Stabilisation in Investment Contracts and Changes of Rules ...€¦ · stabilisation but with respect to the second, ... stability in these particular kinds of long term investment

Association of International Petroleum Negotiators

(AIPN)

Stabilisation in Investment Contracts and Changes of Rules in Host Countries: Tools for

Oil & Gas Investors

Peter D Cameron

ACIArb PhD (University of Edinburgh), LLB (Joint Honours) (University of Edinburgh)

Professor of International Energy Law and Policy CEPMLP, University of Dundee, UK

[email protected]

FINAL REPORT 5 July 2006

© Copyright Peter D Cameron

PDCameron/AIPN/Final Report. 5 July 2006

Table of Contents TABLE OF CONTENTS .......................................................................................................................2 EXECUTIVE SUMMARY & GUIDE TO THE READER................................................................4 GLOSSARY OF TERMS AND ACRONYMS ....................................................................................6 FOREWORD & ACKNOWLEDGEMENTS ......................................................................................8

Scope of the Study ...........................................................................................................................8 Structure of the Study......................................................................................................................9

PART 1: THE PROBLEM ..................................................................................................................12 CHAPTER 1: WHY ATTEMPT TO STABILISE INVESTMENT CONTRACTS IN THE OIL AND GAS INDUSTRY? ......................................................................................................................12

1.1 THE QUESTION: TO STABILISE OR NOT?.......................................................................................12 1.2 TWO LIMITATIONS ON STABILITY.................................................................................................13 1.3 HOW HAS STABILITY BEEN ADDRESSED OVER THE YEARS?..........................................................15 1.4 SUMMARY ....................................................................................................................................19

CHAPTER 2: WHY DO HOST GOVERNMENTS CHANGE RULES? .......................................20 2.1 WAVES AND THEIR EFFECTS .........................................................................................................20 2.2 THE ARMOURY .............................................................................................................................22 2.3 RISKS TO THE HOST GOVERNMENT...............................................................................................24 2.4 SUMMARY ....................................................................................................................................25

PART 2: THE TECHNIQUES & THEIR ENFORCEMENT..........................................................27 CHAPTER 3: THE PRACTICE OF FISCAL STABILISATION...................................................27

3.1 THE HEART OF THE MATTER ........................................................................................................27 3.2 THE MARKET PLACE OF STABILISATION PROVISIONS...................................................................28

3.2.1 Freezing – Wholly or in Part ...............................................................................................28 3.2.2 Economic Balancing ............................................................................................................31 3.2.3. Circumstances of Balancing ...............................................................................................36 3.2.4 Balancing and Expropriation...............................................................................................38 3.2.5 Legislative Support for Stability...........................................................................................39 3.2.6 Stability and BITs.................................................................................................................40 3.2.7 Stability and Hardship .........................................................................................................41

3.3 STABILISATION AND CROSS-BORDER PIPELINE PROJECTS..............................................................41 3.3.1 The West African Gas Pipeline Project................................................................................43 3.3.2 The BTC Pipeline Project ....................................................................................................46

3.4 CAN THE STATE BIND ITSELF BY CONTRACT? ..............................................................................48 3.5 SUMMARY ....................................................................................................................................51

CHAPTER 4: ENFORCEMENT OF STABILISATION PROVISIONS .......................................53 4.1 THE OLD AND THE NEW................................................................................................................53 4.2 THE CLASSICAL AWARDS .............................................................................................................54 4.3 STATING THE OBVIOUS: DUE DILIGENCE......................................................................................56 4.4 INDIRECT EXPROPRIATION............................................................................................................58

4.4.1 Metalclad .............................................................................................................................59 4.4.2 Occidental v Ecuador...........................................................................................................60 4.4.3 Feldman ...............................................................................................................................63 4.4.4 EnCana v Ecuador ...............................................................................................................64 4.4.5 CMS v Argentina..................................................................................................................68 4.4.6 CME v Czech Republic ........................................................................................................68 4.4.7 TECMED..............................................................................................................................69

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4.5 FAIR AND EQUITABLE TREATMENT ...............................................................................................70 4.6 THE GOVERNING LAW..................................................................................................................72 4.7 SUMMARY ....................................................................................................................................74

PART 3: CONTRACT STABILITY IN NON-FISCAL AREAS.....................................................76 CHAPTER 5: ENVIRONMENTAL, SAFETY AND HEALTH EXCEPTIONS...........................76

5.1 MANAGING UNCERTAINTY ...........................................................................................................76 5.2 VULNERABILITY IN NON-FISCAL AREAS ......................................................................................77 5.3 EXAMPLES OF ENVIRONMENTAL RULE DEVELOPMENT ................................................................79

5.3.1 Tanzania .........................................................................................................................79 5.3.2 Kazakhstan......................................................................................................................80

5.4 DESIGNING SOLUTIONS.................................................................................................................81 5.5 BENCHMARKING...........................................................................................................................83 5.6 STANDARDS AND LIABILITY .........................................................................................................85 5.7 ACCESS TO JUSTICE ......................................................................................................................88 5.8 SUMMARY ....................................................................................................................................93

PART 4: CONCLUSIONS AND RECOMMENDATIONS..............................................................95 CHAPTER 6: TOOLS FOR OIL AND GAS INVESTORS .............................................................95

6.1 CONCLUSIONS...............................................................................................................................95 6.2 TOOLS FOR OIL & GAS INVESTORS...............................................................................................99

SELECT BIBLIOGRAPHY..............................................................................................................101 1. LAWS & CONTRACTS CITED IN TEXT......................................................................................101

5.1 Country Legislation and Contracts...............................................................................101 5.2 International Instruments .............................................................................................103

2. AGREEMENTS CONSULTED IN RESEARCH ...............................................................................104 3. ENFORCEMENT........................................................................................................................107 4. INTERNET WEBSITES...............................................................................................................109 5. COMMENTARIES......................................................................................................................110

5.1 Books and Monographs ................................................................................................110 5.2 Reports..........................................................................................................................110 5.3 Chapters in Books.........................................................................................................111 5.4 Articles and Papers.......................................................................................................111

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Executive Summary & Guide to the Reader

The focus of this paper is on mechanisms of contract stabilisation in the international

oil and gas industry. In particular, it examines the stabilisation clauses that are often

introduced into petroleum contracts between host governments and international oil

companies (IOCs).

The first part of the paper examines the context in which stabilisation issues arise

and the various justifications advanced by host governments for changing the rules

(Part 1, chapters 1 and 2).

The second part considers stabilisation techniques and their enforcement, noting that

the classic stabilisation clause amounted to an attempt to ‘freeze’ the terms and

conditions for the life of the contract, while the modern approach is amenable to

negotiation between the parties. A survey of legal practice reveals a number of

published awards that are directly relevant to disputes over the first kind of

stabilisation but with respect to the second, guidance is currently available only from

cases that are principally concerned with related issues such as indirect expropriation.

This part addresses issues that are primarily concerned with fiscal obligations (Part 2,

chapters 3 and 4).

The third part addresses issues of contract stability in non-fiscal areas, and focuses

primarily on the risks to IOCs of instability arising from unilateral changes in areas

that are often expressly excluded from stabilisation clauses in petroleum contracts

(Part 3, chapter 5).

The principal conclusions and recommendations of this paper are set out in Chapter 6

and include the following:

• The classic view of stabilisation as a kind of ‘freezing’ of contract terms over

long periods of time has been in decline, and is probably not enforceable;

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• The interest of IOCs (and their bankers) in such mechanisms is likely to remain

high due to the continuing risk of unilateral alteration of contract terms (albeit for

a variety of reasons);

• The ‘modern’ versions of stabilisation are ones that provide for a re-balancing of

the benefits from the contract in the event of a unilateral action by the host

government;

• Guidance on the enforceability of such clauses is sparse and only available by

analogy;

• Considerable diversity in the design of stabilisation clauses remains with hybrid

forms and approaches to economic balancing in evidence;

• Evidence of reasonable due diligence before conclusion of the petroleum contract

is an essential requirement for the IOC before trying to rely on a stabilisation

clause;

• For cross-border, regional approaches, IOCs are experimenting with innovative

approaches to stabilisation;

• In non-fiscal areas, such as environmental, safety and health matters, host

governments usually seek to exempt them from stabilisation, and

• In these areas, IOCs are seeking to develop mechanisms that ‘manage’ the

resulting risks and provide them with a measure of stability.

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Glossary of Terms and Acronyms APPEA Australian Petroleum Industry Association API American Petroleum Institute BIT Bilateral Investment Treaty BTC Baku-Tbilisi-Ceyhan (pipeline project) EIA Environmental Impact Assessment EU European Union HGA Host Government Agreement ICC International Chamber of Commerce ICSID International Centre for the Settlement of Investment Disputes IFC International Finance Corporation IGA Inter-Governmental Agreement ILM International Legal Materials IOC International Oil Company LCIA London Court of International Arbitration NGO Non Governmental Organisation NOC National Oil Company OECD Organisation for Economic Cooperation and Development OGP Oil and Gas Producers Group PSA Production Sharing Agreement PSC Production Sharing Contract SIA Social Impact Assessment

6


VAT Value Added Tax

7


Foreword & Acknowledgements

This study has been commissioned by the Association of International Petroleum

Negotiators, with a view to elucidating issues that concern the stability of contracts in

an international context in which that stability has become increasingly subject to

challenge. At the time of writing, there is much publicity surrounding the efforts of

some governments in petroleum producing States which are seeking to obtain

improved benefits from the terms and conditions of existing contracts. The reasons

behind these unilateral actions vary but the overriding imperative behind them is a

substantially higher price of oil and gas.

The study does not attempt to cover in an exhaustive way the many issues that are

might be considered relevant to this topic but rather tries to capture some of the

essentials and to comment on how they are being impacted on by some notable recent

trends. There is not a lot here about the history of stabilisation clauses, nor is there

much about the classic arbitral awards such as Aminoil that have attracted an

enormous amount of comment over the years. The assumption is made that most

AIPN members will be familiar with such matters. However, the bibliography at the

end provides ample references for further reading on these aspects, as well as those

that receive most of the attention in this study.

Scope of the Study

The subject matter is stabilisation mechanisms in the context of international

petroleum contracts, and related legal instruments made with respect to petroleum

exploration and exploitation and to a more limited extent to petroleum pipeline

infrastructure projects. These mechanisms provide (or are designed to provide)

stability in these particular kinds of long term investment agreements. In fact, stability

mechanisms may be included in a potentially wide range of legal instruments

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applicable to the petroleum contract, including inter alia: the petroleum law and

regulations made hereunder; the foreign investment law; sub-surface code;

environmental law; tax laws and treaties; arbitral award enforcement; arbitral rules

and enforcement treaties; bilateral investment treaties; multilateral investment treaties

and the frameworks of the civil or the common law (or both). Inevitably, the focus of

this study on stabilisation issues means that the emphasis falls largely on mechanisms

that are designed to maintain the position of the IOC in the petroleum contract itself.

Hopefully, the exercise will also prove worthwhile and even illuminating for those

approaching stability issues from the host government side. The method is

comparative and analytical, illustrating the issues discussed by considering a number

of cases of how such mechanisms work in practice.

Structure of the Study

Part 1 comprises two chapters that set out the foundations for the study. They attempt

to explain – in a very summary way – why contract stability should be problematic in

the international oil and gas industry. They do so firstly from the investor’s point of

view and secondly from the host government’s position. Chapter 1 addresses the

question: why do IOCs seek to stabilise investment contracts in the petroleum

industry? It examines their goals in trying to secure this and observes that in some

significant cases stabilisation by contract is not provided by host governments.

Chapter 2 asks why host governments have taken steps to change the rules of the

investment game after contracts have been signed. A variety of circumstances is

possible, and some of them are considered in this chapter.

Part 2 is concerned with the techniques of stabilisation and their enforcement. The

classical method is usually understood as a ‘freezing’ of the contract terms and

conditions. This has been eclipsed in recent years by provisions that focus on a

balancing of economic interests between the parties. In a way, it recognises that some

change over the life of the project is probably inevitable but, when it happens, there

has to be a corresponding adjustment to ensure that the original terms of the deal

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struck in the contract will survive any such change. Chapter 3 examines the market

place of stabilisation techniques, attempting a tentative classification to promote

understanding. Chapter 4 addresses what is perhaps the crucial issue: enforcement of

stabilisation provisions. It distinguishes the various cases that address stabilisation

dating from the 1970s and 1980s from the more recent arbitral awards that address

expropriation, indirect expropriation and fair and equitable treatment. While the

former category is likely to be familiar to most readers, the latter is not. Some

tentative conclusions are drawn.

Part 3 considers some new developments with respect to stabilisation that are non-

fiscal in character. These touch mainly on matters that are often treated as

‘exceptions’ to the scope of conventional stabilisation mechanisms: environment,

health and safety matters. Some of the ways in which IOCs have attempted to address

these issues by developing stabilisation mechanisms are considered.

Finally, Part 4 presents some conclusions and recommendations, and offers some

guidance with respect to ‘tools for oil and gas investors’ on the basis of the analysis

presented in this study.

* * *

I wish to thank the many AIPN members who have shared their ideas and materials

with me in the course of carrying out this study. As is often the case with AIPN

studies, this author has benefited from access to the very extensive Barrows collection

of materials, and I thank Gordon Barrows for his cooperation. The AIPN appointed a

peer reviewer, Frank C. Alexander Jr., for this study, and I wish to thank him for his

extensive comments on the first draft. His many helpful comments and suggestions

were (and are) much appreciated. As always, responsibility for the contents of this

study lies with the author.

One small caveat may be added. The diversity of practice in the international oil and

gas industry is recognised by all practitioners working in it. This study makes

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generalisations on the basis of the data available to this author, as well as discussions

with colleagues in the AIPN and draws on his own experience as a consultant over

several decades in this industry. It should be seen as a contribution to discussion and

good practice but no substitute for an analysis of the particular and unique

constellation of factors from which each stability issue springs.

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Part 1: The Problem

Chapter 1: Why Attempt to Stabilise Investment Contracts in the Oil and Gas Industry?

1.1 The Question: To Stabilise or Not?

The long term and capital intensive character of investments in the international oil

and gas or petroleum industry underlines the vulnerability of the foreign investor to

unilateral alteration of the petroleum contract by the host government at some

moment in the life of the contract. The provision of a guarantee for stability in the

contract itself is one way of mitigating that risk1. This is its principal attraction for

investors such as international oil companies (IOCs) and their bankers. It has been

defined as “contract language which freezes the provisions of a national system of law

chosen as the law of the contract as to the date of the contract in order to prevent the

application to the contract of any future alternations of this system”2. However, a

striking feature of petroleum regimes around the world is that many of them do not

offer clauses designed to provide ‘stabilisation’ – and in those cases the IOCs appear

to have no difficulty in living with this. Those States that do provide a form of

stabilisation may nonetheless offer a decree of protection that is much less sweeping

in scope than that implied in the above quotation. Whatever its attractions to an IOC,

1 For some recent discussions of stabilisation, see: FA Alexander, ‘The Three Pillars of Security of Investment Under PSCs and Other Host Government Contracts, chapter 7 of Institute for Energy Law of the Center for American and International Law’s Fifty-Fourth Annual Institute on Oil and Gas Law (Publication 640, Release 54), Lexis Nexis Matthew Bender (2003), 7.16-7.28; M Maniruzzaman, Some Reflections on Stabilisation Techniques in International Petroleum, Gas and Mineral Agreements, International Energy Law and Taxation Review (2005) 96, B Montembault, ‘The Stabilisation of State Contracts using the Example of Oil Contracts: A Return to the Gods of Olympia?’ In RDAI/IBLJ (2003) No. 6, 593-643, and A Alfaruque, Stability in Petroleum Contracts: Rhetoric and Reality (unpublished PhD thesis, University of Dundee, 2005). For further references see the Bibliography. 2 Amoco International Finance v Iran, 15 Iran-U.S. C.T.R. 189, 239 (my italics).

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it appears that a stabilisation clause is not a mandatory requirement for a host

government that seeks to attract investment into its petroleum sector.

Some countries have a good track record in dealing with IOCs and as a result the

perception is that political risk is low. Such countries may not offer stabilisation

provisions to an IOC at all (Norway and the UK are examples of this). In other cases,

the perception of political risk may well be high but the perception of geological risk

is low enough for IOCs to accept a contract without stabilisation provisions (Saudi

Arabia, Brazil). A slight variation on this is that some countries will offer the kind of

stabilisation provision that is in fact unenforceable. Some caution has therefore to be

exercised when dealing with this subject. While stabilisation is a way of managing the

risk of unilateral host government changes in the rules, there are many other aspects

of investment that cannot be approached in this way. Even where a host government

does not offer fiscal stability to the IOC, the IOC will use the same methodology to

estimate cash flows, net present value and internal rate of return. These will be

nevertheless only estimates since a commercial discovery may not be made in the first

place; the commercial discovery may have greater or lesser production reserves or

rates than estimated; the cost may be more or less than estimated, and the petroleum

prices may be more or less than estimated.

1.2 Two Limitations on Stability

Where an IOC decides to go ahead and negotiate a stabilisation provision, there are

two important limitations to this exercise. A first limitation is that any undertakings

given by the host country government must be given in a form that is consistent with

the country’s legal and constitutional framework. In most countries (including the

UK, for example), the executive cannot give binding commitments about taxes or

rates of taxation in the future. Indeed, it can be assumed that in every country the

sovereign retains the power – in spite of any laws or contracts to the contrary – to

enact laws that legally will ‘trump’ previous laws (and contracts) and that attempts to

‘freeze’ a petroleum contract will be unenforceable. It is a settled part of international

13


law that host governments have the right to expropriate, even where a previous law or

contract provides a guarantee that they will not. In cases where an increase in fiscal

obligations is proposed, the relevant question will be about the result of such

‘creeping expropriation’ in terms of damages to the IOC or specific performance. The

same will apply with respect to environmental, health and safety obligations although

this is still a relatively untested area.

There are ways around the above constraint however. The NOC may be asked to carry

the burden of any additional fiscal obligations levied beyond the level prescribed in

the contract (on behalf of the investor). Indeed, the host government may choose to do

this itself (Qatar model PSAs; the current model PSA in Trinidad and Tobago). In

some cases, this may only extend as far as the host government’s share of profit oil.

Alternatively, an increase in fiscal obligations that adversely affects the foreign

investor may trigger a provision that other parts of the fiscal regime should be

adjusted to ensure there is no effective change for the foreign investor in the

aggregate of burdens and benefits. This approach (balancing) is discussed elsewhere

in this study (see Chapter 3). In addition, the fiscal regime as a whole has to be

defined in a sufficiently flexible manner that it can respond to a wide range of

economic variables within the contract itself. For example, a fiscal regime may be

provided that is ‘progressive’: as the overall profitability goes up, a larger percentage

of the overall profit goes to the host government, or a fiscal regime could include an

‘effective royalty rate’ that varies in accordance with profitability. In conclusion then,

there are many ways of providing the required flexibility. The key point is that a

flexible, responsive fiscal regime is very helpful if a State is to provide guarantees of

fiscal stability which can be honoured.

A second limitation on the introduction of a stabilisation provision does not concern

the fiscal package itself. Some governments will tend to be wary about providing

guarantees about contract stability that go beyond the fiscal package. In other words,

if a company seeks to obtain guarantees over non-fiscal elements – such as a

guarantee over any legislative change that adversely affects the economics of the

project – and requests an exemption from compliance or, where such exemption is not

14


possible, an adjustment of the fiscal terms by way of compensation. There is a

difference here between a fiscal guarantee and the granting of something like a

separate legal regime to the petroleum contract. In this respect, the legislative capacity

of the State with respect to environmental, health and safety issues which when

exercised may result in an increase in business costs is less likely to be granted a

special protection. Many governments will wish to retain the right unilaterally to

revise the relationship with the IOC in the context of health, safety and environment

matters, without triggering an applicable stabilisation provision. This allows them to

address a situation in which different standards may become applicable in future (for

example, with respect to environmental impact assessment), or that a new

interpretation of existing law in these areas (which is often couched in general and

open-ended terms) is required or that new or amended legislation becomes necessary.

1.3 How has Stability been addressed over the Years?

The origins of stabilisation clauses lie in the period between the first and second

World Wars, when American companies began to include them in concession

contracts due to acts of nationalisation by Latin American governments3. The

essential goal of such provisions was to ensure that the concession contract remain in

force throughout the period stated in the contract. From the mid 20th century to the

1970s the thrust of stabilisation clauses in petroleum contracts was to act as a defence

against expropriation. They did not invalidate a nationalisation but they did have the

effect of making it unlawful, and thereby affect the amount of compensation that a

tribunal might award.

An example of this is the role of a stabilisation clause in a petroleum contract in

Libya, which was reviewed by a tribunal in the context of a nationalisation of the

investor’s interests. The clause provided that the host government “shall take all the

steps that are necessary to ensure that the Company enjoys all the rights conferred

upon it by this concession, and the contractual rights expressly provided for in this 3 Kuwait v Aminoil, 21 ILM 976, 1052 n.7 (1982), 9 YB Com Arb 71, 95 (1984) (Separate Opinion by Sir G Fitzmaurice).

15


concession shall not be infringed except by agreement of both parties”4. Further, the

concession was to be interpreted according to the laws and regulations in effect at the

time it was concluded and amendments were only permitted with the investor’s

consent. The arbitration tribunal held that Libya could not exercise its sovereignty to

nationalise the investor’s interest in violation of these specific contractual

undertakings, and therefore that such nationalisation was a breach of the Deeds of

Concession.

This period had ended by the early 1980s, following highly confrontational revisions

of petroleum contracts and nationalisations of petroleum industry assets, which

triggered several arbitral awards5. It was a period characterised by an analysis of

stabilisation commitments in terms of state responsibility, protection of foreign

property against nationalisation and breach of proprietary contractual interests by the

State: what might be called the classical approach, highly dependent upon public

international law concepts rather than international economic law6. It has been argued

that the years that followed were characterised by an atmosphere of pragmatism in

which mutuality of interests was better understood, especially by the host

governments7. In this context of reasonableness, it might be thought that concerns

about contract stability would become subdued and perhaps even invisible in

negotiations over petroleum contract terms. This did not happen.

4 TOPCO v Libya, 17 ILM 3, 24 (1978), 4 YB Com Arb 177, 178, 183 (1979). 5 A non-exhaustive list would include the following: Saudi Arabia v Arabian American Oil Company (Aramco), 27 ILR 117 (1963); Sapphire Petroleum Ltd v National Iranian Oil Company, 35 ILR 136 (1967); Texaco Overseas Petroleum Company/California Asiatic Oil Company v Libyan Arab Republic, 17 ILM 1 (1977); BP Exploration Company (Libya) v Libya Arab Republic, 53 ILR 297 (1979); Alcoa Minerals of Jamaica v Jamaica, YB Com Arb 206 (1979); Libyan American Oil Company (LIAMCO) v Libyan Arab Republic, 20 ILM 1 (1981); Kuwait v American Independent Oil Company (Aminoil), 21 ILM 976 (1982); AGIP Company v Popular Republic of the Congo, 21 ILM 726 (1982). Arising from the Iran-US Claims Tribunal a little later were: Amoco International Finance Corporation v Islamic Republic of Iran, 15 Iran-US Claims Tribunal Rep 189 (1987); Mobil Oil Iran Inc v Islamic Republic of Iran, 16 Iran-US Claims Tribunal Rep 3 (1987); Phillips Petroleum Company Iran v Islamic Republic of Iran, 21 Iran-US Claims Tribunal Rep 79 (1989). 6 TW Waelde and G Ndi, Stabilising International Investment Commitments: International Law Versus Contract Interpretation, in 31 Texas International Law Journal (1996), 215, 219. 7 R Brown, `Contract Stability in International Petroleum Operations’, The CTC Reporter, No. 29 (spring 1990), 56-60.

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Two broad patterns of behaviour became discernible with respect to stabilisation.

Firstly, a significant number of countries chose not to provide commitments on

contract stability at all. Countries with significant proven reserves such as Saudi

Arabia, Nigeria or Indonesia did not regard it as necessary to provide such guarantees

to foreign investors. Among the OECD countries, many petroleum regimes provide

for a static, relatively inflexible, fiscal regime, which contains no stabilisation

provision (Norway, UK, Canada, the USA and Australia, for example). In these cases,

the content of such contracts or licences is scarcely affected by any negotiations

between IOCs and host governments, since the terms on offer are largely

standardised. Secondly, a large group of countries, eager to attract foreign investment

in a competitive international market place, offered stabilisation commitments to

investors, and many continue to do so. However, the form of these provisions is

frequently different from those in the period we have called ‘classical’. In particular,

there were elements of balancing or negotiation introduced, and sometimes a

combination of these with the familiar element of ‘freezing’ of some of the contract

terms. This group included a number of the so-called transition economies in the

1990s, as well as African states, and in Latin America, it included Bolivia, Ecuador

and Peru.

Contract stability was also affected – and arguably enhanced for the IOCs – by the

growth of NOCs since the 1980s. This means that sometimes the contract for

exploration and production is made between the foreign investor(s) and the NOC

rather than the State itself, and on other occasions between the NOC and the host

government. A stabilisation clause may therefore be negotiated with the NOC rather

than the State itself. This is not in practice a complicating factor and may make it

easier to reach an agreement. It has a bearing on situations where, in the case of PSCs,

the host government pays additional fiscal obligations on behalf of the IOC

(Azerbaijan, 1980s Qatar model PSC) or does so only to the extent of the host

government’s share of profit oil (current PSCs in Trinidad and Tobago; current PSCs

in Egypt). This effective tax exemption is only applicable to the extent of the NOC’s

(or host government’s) share of profit oil.

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With respect to its impact on fiscal stability, the host government seems to be

effectively granting a specific tax exemption in the event of a change in the overall

tax regime. However, in cases where the NOC or host government share of profit oil

is relatively small, this mechanism will provide only a modest ‘insurance policy’

against increased taxes, especially where the PSC regime provides for royalty and/or

state participation. In some PSCs in Trinidad and Tobago, the host government’s

share of profit oil has been used up in the face of additional fiscal obligations.

Moreover, in cases where the stabilisation provision in a contract provides for a re-

balancing of the fiscal provisions in the event of a unilateral measure taken by the

host government (see Chapter 3), not all of the fiscal obligations are necessarily

included in the re-balancing that the contract envisages in such an event. Some may

address only increases in taxes. As a result, the IOC is left with a significant exposure

to the imposition of other forms of fiscal obligation. With respect to enforcement of a

stabilisation provision, the NOC as signatory to the contract might improve the

likelihood of the IOC obtaining specific performance and not just lump sum damages

from a tribunal. However, there are (as far as I am aware) no known arbitral awards

for these more modern stabilisation mechanisms that involve some re-balancing of the

economic interests of the parties in the event of a unilateral change by the host

government8. The awards that are currently available for reference in this context (see

Chapter 4) are concerned with expropriation or more recently with ‘freezing’ of

contractual provisions, where only lump sum damages are available.

Finally, it may be noted that the current generation of petroleum contracts are much

more complex than the old style concessions that contained the ‘anti-expropriation’

stabilisation clauses. A principal reason why the contracts have become complex is

simply that the parties are attempting to ensure that the agreement concluded will as

far as is possible respond to changing or unpredictable circumstances. The way in

which the contract has been negotiated and drafted will determine just how adaptable

it is in practice. The subjects too that a petroleum agreement will attempt to address

8 RD Bishop, ‘International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea’ (author’s copy).

18


have considerably broadened in recent years, with a considerable increase in the

impact made by non-fiscal issues such as environmental and social ones.

1.4 Summary • The long term character of international petroleum investments coupled with the

history of unilateral action by a number of host governments has made

stabilisation commitments in petroleum contracts attractive to investors;

• The form of stabilisation commitments sought by investors has shifted from an

emphasis upon ‘freezing’ the terms and conditions of contracts to one in which

stabilisation can take a number of forms, often with an emphasis on balancing

achieved through negotiation;

• A significant number of countries, especially (but not only) those with proven

petroleum reserves, do not feel the need to offer stabilisation provisions to attract

investors;

• Many stabilisation provisions are likely to be subject to two limitations: the

constraints imposed by the wider legal and constitutional framework on the

guarantees provided in the petroleum contract, and any exceptions required for

non-fiscal matters.

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Chapter 2: Why do Host Governments Change Rules?

2.1 Waves and their Effects

From 2003 onwards, host governments in a number of countries began efforts to

change the fiscal arrangements in petroleum contracts in several major petroleum

producing countries9. The motives for these unilateral steps are far from uniform

although the steep rise in international oil prices played an important part. At a macro-

level they reflected a change in producer-consumer country dynamics or bargaining

power, with the producing countries seeking to improve the benefits from their

contractual arrangements.

As noted in the previous Chapter, there have been several sweeping attempts at

expropriation and forced renegotiations in Latin America and the Middle East in the

1970s, resulting in much discussed arbitral awards addressing compensation issues10.

Among the OECD countries, those few countries with petroleum resources were also

quick to take action against perceived unfair contract terms. The United Kingdom was

an example of this. In the mid 1970s, it introduced a wholesale renegotiation of

license terms, a new form of petroleum taxation and a forced introduction of a carried

interest for its newly established state oil company in all North Sea field

developments11. In the current wave of government actions, both the UK and the USA

have imposed additional obligations on investors in the light of oil price increases.

The UK increased its petroleum taxation burden in December 2005. In his Statement

9 Argentina does not fit into this category but disputes arose before the ICSID over stabilisation commitments with respect to stability provisions in agreements reached from 2003 onwards between producing and refining companies over crude oil, gasoline and gas oil prices, discussed in Chapter 4 below. The Government was the driver behind the conclusion of these stability agreements. 10 In Ecuador’s case, this appears to have occurred the other way round: first, an arbitration award in favour of an IOC (Occidental), then an expropriation: Occidental Press Release, 17 May 2006: ‘Occidental Files Claim against Government of Ecuador’. The ICSID cases that prefigured this action are discussed in Chapter 4. 11 This is described in considerable detail in my book, ‘Property Rights and Sovereign Rights: The Case of North Sea Oil’, Academic Press, London, 1983.

20


the Chancellor of the Exchequer (the Finance Minister) noted that “returns in the

North Sea are now nearly 40 per cent on capital, compared with ordinary returns of 13

per cent”. He added that “(w)ith the tax on new development in the North Sea now

lower than in the USA and the Gulf of Mexico, Norway, Italy and Australia, and in

order to strike the right balance between producers and consumers, I will raise the

supplementary North Sea charge from 10 per cent to 20 per cent…”12. It should be

noted however that tax arrangements lie outside the licences or contracts and are not

stabilised. Separately, the US House of Representatives approved a plan to renegotiate

Gulf of Mexico petroleum leases in May 2006, addressing leases granted between

1998 and 1999 that exempted petroleum companies from fees from exploitation in the

Gulf of Mexico regardless of how high prices went. It appears that this was designed

to correct an error in the Deep Water Royalty Relief Act of 1995 that was designed to

cut royalties when energy prices were low and boost them when prices were high.

While this operated with respect to leases in 1996, 1997 and 2000, the leases in

question were not subject to a price threshold13. At a time of high oil and gas prices,

this was highly beneficial to the lease holders.

However, caution should be exercised in making comparisons with the current wave

of host government unilateral action. The motivations appear to arise from very

different political pressures and changed circumstances in each case, with actions in

Venezuela being hard to compare with host government actions in Nigeria or even

elsewhere in Latin America14. Most importantly, for our purposes, the host

government actions are not necessarily taking place in countries that have offered

stabilisation provisions in their contracts. They do underline the fact that unilateral

amendments to petroleum contracts by host governments remain a significant risk

factor for investors, especially when the oil price rises substantially as it has in recent

years. In the latter circumstances, experience suggests that governments in producing

12 HM Treasury, Pre-Budget Report 2005, 5 December 2005 at www.hm-treasury.gov.uk 13 Bloomberg News Service, ‘House Approves Proposal to Recover $10 Bln from Oil Producers’, May 19, 2006. 14 The increase in royalty proposed in Bolivia called the IDH appears to be in breach of a provision in the 1996 Hydrocarbon Law 1689 which stabilised royalties (only) for the duration of the Joint Venture form of contract. The circumstances behind unilateral state action in Venezuela and Ecuador appear to be quite different.

21


countries will usually tend to put measures on the table that secure for them a larger

share of the rent than was agreed upon at the time the contract was made. This could

even be seen as a normal reaction to a certain phase in the price cycle.

Another reaction is more relevant to this study. One of the effects of a wave of

unilateral actions is that both IOCs and host governments eager to attract petroleum

investment may respectively seek and offer stabilisation provisions that they might

not otherwise have sought or offered. In a climate of uncertainty they appear to offer

an additional security against political risk. However, this may have the consequence

that in future years such provisions prove too inflexible or become otherwise a source

of dispute. An echo of this process may be found in the case of Kazakhstan in the

1990s, which arguably agreed on fiscal terms that it did not fully understand (or its

advisers did not fully explain), with revenue and profit sharing implications that it

found to be unacceptable several years later, leading to a battery of changes in the tax

and subsoil legislation15. However, Kazakhstan also provides a good example of how

a host government can, at a later stage in its petroleum development and capacity

building, carry out an overhaul of its regime in such a way as to continue the grant of

stability provisions in future contracts and insistence on a ‘no-revision’ policy with

respect to existing petroleum contracts16.

2.2 The Armoury

One of the reasons why a host government may choose to introduce rule changes to

the petroleum contract at a later date is simply that it can. Any host government

possesses a wide range of instruments that it may use against an incumbent investor, a

15 An overview of the changes proposed at that time is contained in Aset Shyngyssov’s article, ‘Tax Stability and Assurances for Petroleum Operations’, in Oil & Gas of Kazakhstan (2004), 60-67 (www.oilgas.kz). 16 This was particularly evident in 2003 when two new taxes were being introduced (on export of crude oil and on windfall profit). It was expressly stated that the new taxes were only applicable to new oil projects; all the contracts concluded before the new law were subject to a stabilised tax regime. The country has many stability guarantees in its laws including those on investment, foreign investment, subsoil and petroleum. However, the various Tax Codes adopted since 1995 do show a gradual whittling away of the guarantees on stability with respect to adverse changes in the tax laws. Moreover, tax stability is now provided through several different provisions that are not entirely consistent.

22


veritable armoury of legal and policy instruments. This feature of the investment

climate merits some consideration.

A host government may introduce new laws, decrees or regulations that have an

impact upon the legal and economic environment of the petroleum contract with

negative effects upon its terms as a result. However, it may also introduce a measure

that has a direct impact upon the terms of the petroleum contract itself. These may

include measures such as the following17:

• An increase in the applicable tax rate or royalty rate;

• An increase in the applicable tax base;

• Imposition of new taxes or new royalties;

• Revisions, in the context of PSCs to the calculation of ‘cost petroleum’ or the

‘profit petroleum split’;

• An increase in the percentage of participation available to the host

government designated participant in the context of ‘government

participation’ – or in the cost sharing obligations of the host government

participant;

• A change in the allocation, between the IOC and the host government, of

management and control over petroleum operations, inclusive of contracting

for goods and services with third parties;

• Increases in, or imposition of, restrictions in regard to the IOC’s right to

‘monetise’ a discovery;

• Increases in, or imposition of, restrictions to the IOC’s right to export, or

• Increases in, or imposition of, the IOC obligation to market petroleum within

the host country (including pricing), by way of a ‘domestic sales obligation’.

These are only the more obvious levers at the disposal of a host government that is

seeking to change the terms of an existing petroleum contract. Indirectly, there are

other levers available to it in any complex petroleum development project, which do

not fall directly under the heading of ‘tax or legal stabilisation’. Examples would

17 FA Alexander Jr. (2003), see note 1, 7.16-7.17.

23


include: the State’s approval for a field development plan and powers to issue other

necessary permits; the State’s right in many PSA projects to veto the proposed annual

budgets; powers over local content; investor’s liability over project delay and use of

environmental compliance powers (which are not usually stabilised). The investor

may also be keen to expand its business in the host country by bidding for or

negotiating entry into new projects. This may be raised by the host government in its

‘discussions’ with the investor.

2.3 Risks to the Host Government

For a great many governments around the world that play or would play host to

petroleum investors, there is plenty of evidence of the risks and uncertain rewards of

unilateral action against investor interests. The foregoing examples illustrate the speed

with which a number of investors will bring a case before an arbitral tribunal and seek

compensation. Apart from the legal counter-measure from the investor, there is also

an effect of negative publicity for the country’s investment climate.

If the host government does elect to take unilateral action, what happens next? In

some agreements there is a provision for a measure of negotiation that aims at

restoring a disrupted equilibrium (discussed in Chapter 3). Even if there is not a

formal provision that requires this (and often there is), some form of negotiation will

probably be the first step of choice by the parties that will result from disrupted

equilibrium. The IOC will invoke the stabilisation clause and probably also refer to

the provision on arbitration. Usually, the parties will produce economic models to

support their case, with the IOC arguing that the economic equilibrium has been

disturbed in a way that negatively impacts on it. The host government may have

difficulty in providing a reasonable model to the effect that the damage is marginal or

negligible if there has been an increase in income taxes or royalties, or if some other

fiscal obligation has been imposed. Where this increased fiscal obligation is in

defiance of a stabilisation mechanism, the ‘cost’ of the additional tax could be

24


determined with some precision, and indeed could lead to a corresponding reduction

in the host government’s share of profit oil.

In the face of failure of this initial step, the State will have to consider how to address

a possible activation of the arbitration mechanism. However difficult it may be to

ensure that the relevant considerations are present for a stabilisation mechanism to be

enforceable and lead to the award of damages, there are other grounds on which

investors may justify and enforce a claim. Recent arbitral awards are fairly consistent,

although as far as this author is aware, none of them relate directly to stabilisation

provisions. The thrust, as we shall see, is clear however. In all of these awards,

compensation in the form of lump sum damages and/or specific performance of the

stabilisation provision was required for breach of the investment agreement.

2.4 Summary

• The risks of unilateral action by host governments remain as significant for

investors today as ever before and are evident among a wide range of

governments. For that reason the provision of a stabilisation clause holds out the

prospect of additional security. However, an over-eager willingness on the part of

host governments to offer such security may spring more from a policy of

investment promotion rather than a full appreciation of the commitment that is

being made. In this respect, investors would be wise to take extra care with the

design of mechanisms for possible use in enforcement at a later date.

• Host governments have a wide range of instruments at their disposal for the

introduction of unilateral measures. It should also be noted that other powers

deriving from the petroleum law regime will usually offer the government

opportunities to persuade the investor of its case or to strike a compromise

arrangement.

25


• The risks to the host government itself of taking unilateral action (such as the

damage to its reputation as an investment location) offer potential solutions.

Negotiation about the differences generating a proposed unilateral action should

be enhanced by an awareness of these possible consequences.

• This volatile context facing investors suggests that those forms of stabilisation

that attempt to ‘freeze’ the provisions of a petroleum contract over long periods

of time are likely to prove much less effective than provisions that focus on the

results of a possible unilateral revision in the petroleum contract and which adapt

the wording of the stabilisation mechanism accordingly.

26


Part 2: The Techniques & their Enforcement

Chapter 3: The Practice of Fiscal Stabilisation

3.1 The Heart of the Matter

At the heart of negotiations about any international petroleum contract is the fiscal

regime which, in the event of commercial discovery, will determine how the profits

and revenues are to be divided between the State (and usually the NOC) on the one

hand and the IOC on the other. This will involve more than taxes and royalties. The

determination of a modern fiscal regime – in a PSC at least - will involve agreement

on the provisions for and the timing of cost recovery and the division of profit oil. If

agreement is reached on all the essentials, this may nonetheless be undermined if the

contract cannot be given some degree of stability.

Apart from stability of the fiscal regime, the other concerns of the investor will be

those provisions that have a likely impact upon investment recovery and profit such as

security of contractual and proprietary rights and titles, the right to sell petroleum and

the right to export. Further, the investor will seek the right to retain and repatriate

foreign exchange earned, to retain the proceeds of export sales offshore without

mandatory currency conversion, and operational freedoms consistent with

international standards.

This does not mean that the parties will consider that a specific clause on

‘stabilisation’ is essential. A number of countries have not found it necessary to offer

any kind of stabilisation provision in their petroleum regimes. Examples are the North

Sea states of Norway and the UK, several Latin American countries such as Brazil

and Colombia, and the United States. In these cases the fiscal terms will be stipulated

27


(or referred to) in the petroleum contract (or licence) and no additional undertaking by

the host government to stabilise the fiscal regime will normally be considered

necessary.

If a definition may be ventured at this stage, it could be said that in the context of an

international petroleum contract, the notion of stabilisation can be taken to mean all of

the mechanisms, contractual or otherwise, which aim to subject the contract

provisions to specific economic and legal conditions which the parties considered

appropriate at the time that the contract was concluded18. As we shall see, in many

petroleum contracts such references to maintaining the relationship which prevailed at

the time of signature of the contract are explicitly provided. However, more often, the

term `stabilisation’ is applied less to the exclusion of future legislation but to the

provision of mechanisms which can manage the impacts of new legislation on the

petroleum contract.

3.2 The Market Place of Stabilisation Provisions

3.2.1 Freezing – Wholly or in Part

Even if a host government decides to provide for stability in the contractual

relationship, it will rarely provide the kind of full scale stabilisation that stipulates that

neither the fiscal nor the non-fiscal elements of the contract may be varied by the host

government during the life of the contract. This is sometimes called a ‘freezing’ of the

contractual terms. However, less extensive forms of ‘freezing’ are indeed found, such

as in Angola, Cambodia, Guyana, Iraq, Kazakhstan (in a highly qualified way, with

some exceptions), Malta, Poland and Tunisia19. Other forms of ‘freezing’ may be

essentially directed at insulating the IOC from expropriation by the host government

18 The purpose is not necessarily to subject an IOC to all relevant legal conditions that prevail at the time the agreement is concluded since the parties may wish to provide that the host government shall indemnify the IOC from the application of certain laws that are in fact applicable as of the date at which the agreement was concluded. 19 However, it should not be assumed that such an approach is a matter of petroleum policy that influences the design of all petroleum contracts awarded at all times.

28


or which expressly permit expropriation but provide for an applicable amount of

damages in such an event. In the former case, such efforts to immunise the contract

are not likely to prove enforceable or otherwise reliable as a way of providing the IOC

with the amount of damages that the IOC would be seeking in the event of unilateral

changes.

Some examples of ‘freezing’ are the following:

(1) An express stipulation of inviolability (Mozambique):

“The Government shall not revoke or amend the Authorisation granted to

ENH to explore for and produce Petroleum from the Contract Area without

taking effective measures to ensure that such revocation or amendment does

not affect the rights granted to the Contractor hereunder”20,

And:

“The Government will not without the agreement of the contractor exercise its

legislative authority to amend or modify the provisions of this Agreement and

will not take or permit any of its political subdivisions, agencies and

instrumentalities to take any administrative or other action to prevent or

hinder the Contractor from enjoying the rights accorded to it hereunder”.

(2) Stabilisation stricto sensu and inviolability (Nepal):

“His Majesty’s Government shall ensure that during the term of this

Agreement the Contractor’s rights and obligations hereunder shall not be

changed unilaterally”21.

Similarly (The Ivory Coast):

“The petroleum contract in particular must set: …(t)he legal conditions

concerning the applicable law, the stability of conditions, the cases of force

majeure and the regulation of disagreements …”22

20 Model Production Sharing Contract, 2001, Art 30.7(d) and (e). 21 Model Production Sharing Contract, 1994, Art 70.1. 22 Petroleum Code 1996, Art 18(m).

29


(3) Some agreements attempt to ensure the pre-eminence of contractual terms over all

other regulations. In the example below (from Tunisia) not only regulations are

mentioned but also their interpretation:

“The Contractor shall be subject to the provisions of this Contract as well as

to all laws and regulations duly enacted by the Granting Authority and which

are not incompatible or conflicting with the Convention and/or this

Agreement. It is also agreed that no new regulations, modifications or

interpretation which could be conflicting or incompatible with the provisions

of this Agreement and/or the Convention shall be applicable”23.

A more common approach than an attempt to ‘freeze’ the terms and conditions of the

contract in toto is to provide ‘partial’ stability, with respect to an element or elements

of a contract such as royalty or income tax. Another category of partial stability may

be distinguished that emphasises areas that are to be excluded from contract stability.

Some governments grant a comprehensive fiscal stability that includes all measures

that impact on the financial position of the IOC but excludes measures taken by the

host government with respect to environmental protection, safety and health.

This example from Bolivia provides stability only for royalty and permits:

“In Article 52 of the Hydrocarbons Law, the system of royalties and permits to

apply to this Contract shall remain fixed throughout its term”24.

This example from Chile stabilises only taxes:

“The tax regime, benefits, privileges and exemptions provided in any of the

articles hereof, which shall be recorded in the special operation contract,

shall remain invariable for the duration thereof”25.

23 Model Production Sharing Contract, 1989, Art 24.1. 24 Model Production Sharing Contract, 1997, Art 12. 25 Decree-Law 1089 of 1975, Art 12 and 12.1.

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3.2.2 Economic Balancing

In many parts of the world, the most typical kind of commitment involves some form

of ‘economic balancing’. Essentially, the provision stipulates that if the host

government adopts a measure subsequent to the conclusion of the petroleum contract

in which the fiscal terms are stated, that is likely to have damaging consequences to

the economic benefits for one or both of the parties, a re-balancing will take place.

Petroleum contracts differ in their treatment of how that balancing will be effected.

On one view, the adjustment may be automatic or achieved in a manner stipulated in

the contract so that the economic balance struck between the parties on the effective

date of the contract is re-established. On another view, however, there is no need to

provide in the contract for the manner of such adjustment or to stipulate that it should

be the result of mutual agreement between the parties. A third approach is to make

express provision for the parties to discuss how amendments should be made to the

contract to permit economic balancing26. Inevitably, the very large number of

petroleum contracts in existence around the world allows for a considerable diversity

of approaches including hybrids of the ones outlined above.

An example of the economic balancing approach with a strong element of negotiation

(the third approach above) is contained in a Concession Agreement awarded in Egypt

in 2002. Article XIX reads:

“In case of changes in existing legislation or regulations applicable to the

conduct of Exploration, Development and production of Petroleum, which

take place after the Effective Date, and which significantly affect the economic

interest of this Agreement to the detriment of CONTRACTOR or which

imposes on CONTRACTOR an obligation to remit to the A.R.E. (Arab

Republic of Egypt) the proceeds from sales of CONTRACTOR’s Petroleum,

CONTRACTOR shall notify EGPC (the NOC) of the subject legislative or

regulatory measure. In such case, the Parties shall negotiate possible 26 FA Alexander Jr. refers to these three approaches as, respectively, ‘Stipulated Economic Balancing’; ‘Non-Specified Economic Balancing’, and ‘Negotiated Economic Balancing’: see Three Pillars (see note 1).

31


modifications to this Agreement designed to restore the economic balance

thereof which existed on the Effective Date.

The Parties shall use their best efforts to agree on amendments to this

Agreement within ninety (90) days from aforesaid notice.

These amendments to this Agreement shall not in any event diminish or

increase the rights or obligations of CONTRACTOR as these were agreed on

the Effective Date.

Failing agreement between the Parties during the period referred to above in

this Article XIX, the dispute may be submitted to arbitration, as provided in

Article XXIV of this Agreement.”27(Author’s emphasis added)

Clearly, the level of comfort provided by such a clause will not be great, and more

reassurance may be found in the arbitration provision. In the second paragraph, the

Parties – namely, the Government, the NOC and the investor - commit themselves to

a ‘best efforts’ approach to negotiating their economic balancing. A time limit to the

negotiations is however stipulated and the third paragraph appears to suggest that the

amendments sought through negotiation are intended to restore the disrupted

equilibrium: no more and no less (although the wording is not free from ambiguity).

A similar approach to rebalancing the contract with negotiations included is found in

Vietnam. Currently, all Vietnam PSCs use stabilisation clauses in some form or

another, stating generally that if any change in law or regulation adversely affects the

Contractor’s interests or revenue, the Contractor and PetroVietnam (the NOC) shall

meet and agree on changes to the contract to ensure the Contractor’s interests are not

diminished in any way. Occasionally, the stabilization clause will also specifically

include rights to go to arbitration if agreement is not reached within a certain time

period. It does not seem that the arbitrator would necessarily have the power to

rewrite the contract without clear ‘amiable compositeur’ authority being granted to

27 Concession Agreement of 2002 for Petroleum Exploration Exploration & Exploitation between Egypt & The Egyptian General Petroleum Corporation & Dover Investments Limited (East Wadi Araba Area Gulf of Suez): source: Barrows Company Inc.

32


the tribunal in the contract itself. Instead, a tribunal would probably award the IOC

only lump sum damages.

The Russian law on production sharing (1996, as amended) is another example of

economic balancing, but with the inclusion of exceptions. Article 17.2 provides that in

the event of a national or local regulation affecting the commercial results of the

investor the agreement is to be varied in order to ensure that the investor obtains the

same commercial results as would have flowed had the regulation in existence at the

time of the contract conclusion continued to apply. In certain circumstances this rule

does not apply however: in cases such as those where the variations apply to the

security of the works, conservation of mineral resources, and protection of the

environment or public health28. The latter approach to a ‘carve-out’ is not unusual.

A further illustration of a provision on economic balancing – from Mozambique –

contains a strong element of negotiation in it and includes a provision for exemptions.

Alongside the stabilisation requirement for the fiscal package, it includes another

provision that asserts the State’s continuing capacity to take measures in certain areas

such as environmental protection. However, such measures are not without

restriction: they must not be unreasonable and they must be in accordance with the

standards generally accepted from time to time in the international petroleum

industry. The words `from time to time’ imply that such standards will develop in the

course of the petroleum project and that the actions of the investor will be expected to

reflect that development. The clause also provides an illustration of the dual focus of

modern stabilisation concerns: firstly, the economic issues that lie at the heart of a

petroleum or pipeline agreement and secondly, the various, non-economic matters

that are occupying a role of growing importance in negotiations on petroleum

projects, whether upstream or downstream.

Mozambique29

28 The value of the example is undermined however by the fact that only one PSC has been awarded under this – essentially defunct – law (which also grandfathered in three other PSCs). 29 Mozambique (1998) – Sofala field; contract from author’s collection; author’s italics.

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1. In the event that after the Effective Date any applicable law, decree, rule or

regulation of the Republic of Mozambique including the Income Tax Code as

the same applies to Industrial Tax, not being a law, decree, rule or regulation

of the kind referred to in Article [ ], is made or amended which results in an

adverse change of a material character to the economic value derived from

the Petroleum Operations by the Contractor, the Parties will, if the Contractor

so requests, meet as soon as possible thereafter, to agree on changes to this

Agreement which will ensure that the Contractor derives from the Petroleum

Operations, following such changes, the same economic benefits as it would

have derived if the law, decree, rule or regulation aforesaid had not been

made or amended.

2. Nothing in the provisions set out in this Article shall be read or construed

as imposing any limitation or constraint on the scope, or due and proper

enforcement, of Mozambican legislation of general application which does not

discriminate, or have the effect of discriminating, against the Contractor, and

provides in the interest of safety, health, welfare or the protection of the

environment for the regulation of any category of property or activity carried

on in Mozambique; provided, however, that the Government will at all times

during the life of the Petroleum Operations ensure in accordance with Article

[ ], that measures taken in the interest of safety, health, welfare or the

protection of the environment:

(a) Are in accordance with standards generally accepted from time to

time in the international petroleum industry; and

(b) Are not unreasonable.

Another notable feature is the use of the words ‘changes to this Agreement’: if the

parties fail to agree upon the changes, what recourse might the IOC have? Would a

duty of good faith effectively constitute an obligation on the part of the host

government to agree upon any such changes? The questions suggest that this is not to

34


be recommended as a model, but is nonetheless worthy of inclusion as an illustration

of possible problem areas in its operation.

A further example is one of a stabilisation clause that attempts to combine freezing

with economic balancing by negotiation – very common around the world. It is

contained in a Kazakh PSA30. It begins with a simple statement that the contract terms

must remain inviolable during the entire life of the contract. Then it adds that any

changes made in the country’s general laws shall not worsen the contractor’s position.

Article 21 reads (on stability of the tax regime):

21.1. The Tax Regime set forth in the Contract shall be permanently in

effect until the expiration of the Term of the Contract.

21.2. If changes are made in the law after the Contract signing data that

make further observance of the original terms and conditions of the Contract

impossible or that lead to a significant change in its general economic terms and

conditions, the Contractor and representatives of the Competent Body and Tax

Agencies may make changes in or correction to the Contract that are needed to

restore the economic interests of the Parties as of the Contract signing date.

These changes in or correction to Contract terms and conditions shall be made

within sixty days of the time of written notification of a Tax Agency or the

Contractor.

The references to possible changes in the general laws make it quite clear that what

they envisage are economic and not only fiscal changes. This could include, for

example, abrogation of the IOC’s right to export or abrogation of the IOCs right to

develop and/or produce a discovery. The requirement that changes are to be made

within sixty days raises the question: what are the IOC’s available remedies if there is

no agreement during this period? 30 Contract for additional exploration for and production and production sharing of crude hydrocarbons in the Chinarevskoye Oil and Gas-Condensate Field in West Kazakhstan Oblast pursuant to licence series MG no. 253D (Petroleum) between the Republic of Kazakhstan State Committee for Investments (the Competent Body) and Production sharing agreement between The Republic of Kazakhstan State Committee for Investments (the Competent Body) and the Zhaikmunai Limited Liability Partnership (the Contractor), Kazakhstan, 1997.

35


One final example will illustrate how pivotal the role of the NOC can be during any

economic balancing. The PSA for several fields in Azerbaijan concluded in 199431

states that if the rights or interests of the Contractor have been adversely affected by

unilateral action by the host government with negative consequences for the

Contractor’s rights or interests, the NOC (SOCAR) “shall indemnify the Contractor

(and its assignees) for any disbenefit, deterioration in economic circumstances, loss or

damages that ensue therefrom”. The NOC is also charged to “use its reasonable

lawful endeavours” to take appropriate measures “to resolve promptly in accordance

with the foregoing principles any conflict or anomaly between such treaty,

intergovernmental agreement, law, decree or administrative order and this Contract”.

The role of SOCAR in the contract underlines an important point. In a number of

cases the host country’s NOC will play a central role in the operation of fiscal

stabilisation. It may provide for adjustment by paying any additional taxes out of its

share of profit petroleum or royalty under a PSA or it may reimburse the IOC directly

out of general revenues. Under a rate of return system, the NOC could pay from its

share of royalty and/or excess profits tax.

3.2.3. Circumstances of Balancing

The need for economic balancing may not always arise because the IOC interest has

been damaged by a legal measure unilaterally introduced by the host government or

the NOC32. It is possible that a unilateral action by the host government has the effect

of improving the benefits of the IOC that accrue from the contract, in relation to the

31 Agreement on the Joint Development and Production Sharing for the Azeri and Chirug Fields and the Deep Water Portion of the Gurashli Field in the Azerbaijan Sector of the Caspian Sea, 20 September 1994, Article XXIII.2. 32 In practice, the effects of a new legal or regulatory measure may not be easy to assess in advance, especially if a combination of possible favourable and unfavourable elements is involved (or could be asserted to exist). The Mauritania PSC of 1994 Article 27.3 states: “No legislative provision can apply to a Contractor which has as its effect the aggravation, directly or indirectly, of the duties and obligations under this Contract and under the legislation and regulations in force as at the date of signature of this Contract, without the prior agreement of the Parties”. The IOC has to meet the test that damage has occurred.

36


balance struck at the time of signature of the contract. In some cases, a stabilisation

clause may be designed so that a re-balancing is required when either the IOC’s

position is damaged or improved.

In some circumstances, a host government might insist upon adherence to a

stabilisation clause in spite of difficulties that have arisen for the investor through

actions by a neighbouring government, and not by any action of its own. The

Karachaganak field PSC contained a stabilisation clause which led to exactly this

effect in 200233. The Kazakh tax regime which was applicable at the date when the

contract was stabilised, implied that VAT for sales of hydrocarbons into the Russian

Federation was to be charged in Kazakhstan. Russian buyers could reclaim (offset or

obtain a refund from the Russian budget) input VAT charged in Kazakhstan against

their output VAT in Russia. However, with effect from 1 July 2002, Russia changed

its tax code so that foreign VAT could not be included in the calculation of VAT to be

paid in Russia. The economic effect on the buyers of Karachaganak condensate was

that their purchasing costs increased by the amount of VAT charged on the

Karachaganak consortium in Kazakhstan (20%). Hence, the Russian buyers requested

that the sales price of Karachaganak condensate should be reduced by the amount of

the now non-recoverable VAT. The consortium could not agree to this proposal, the

sales contracts were not signed and the field was shut-in for more than two months

from September 2002. Production restarted from the field in November 2002 when

the consortium realised that the losses from suspended production exceeded the

negative effect from the reduced sales price. So what was the position of the Kazakh

tax authorities on the applicability of the stabilisation clause to this case? The clause

in the PSA was as follows:

“Stability of Tax Regime. The tax regime provided by Article XIX is stable for

the entire effective period of this Agreement pursuant to the provisions of

Article 94-3 of the Tax Code existing at the date hereof.

Taking into account that the Tax Regime was established by Tax Legislation of

the Republic existing as of October 1, 1997, the authorized bodies of the

33 The project was operated by a consortium of ENI-BG-Chevron-Lukoil.

37


Republic are liable to inform Contractor in writing concerning any

amendments and additions of the Tax Legislation or other legal acts

regulating payments of taxes and fees prior to the date hereof. In the case of

absence of such notifications, provisions of those amendments and additions

from October 1, 1997, till the date hereof shall not apply to Contractor and

each Contracting Company.”

The Kazakh authorities took the view that the tax stabilisation clause was entirely

applicable to this case and that Kazakh VAT should continue to be charged at the rate

of 20% in Kazakhstan irrespective of any changes in the tax legislation in the Russian

Federation. The consortium elected to accept this decision and to live with a reduced

sales price that appeared to be legally unchallengeable. One risk to the investor of

attempting to change the above clause to meet this situation was that the Government

might take the opportunity to renegotiate the entire PSA or other parts of it that it

deemed unsatisfactory. Annual losses of revenue to the consortium from this

development were probably in the region of US$50 million.

3.2.4 Balancing and Expropriation

The target of a balancing provision is not to tackle an attempt at expropriation by the

host government. If a host government aims at full nationalisation of the IOC

operations, this is unlikely to be anticipated in this kind of stabilisation provision.

Other approaches to stabilisation have however taken such expropriation into account

and may be designed to prevent it. However, a more common risk facing an IOC in

practice is that of ‘creeping expropriation’, where a unilateral revision of the

contractual relationship (or some aspect of it) results in damage to the IOC’s position

but does not amount prima facie to an act that could be described as one of

expropriation. This subject is addressed in some detail in Chapter 4 below (see also

section 3.4 of this Chapter).

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3.2.5 Legislative Support for Stability

In a number of countries legislative support may also be given to petroleum

agreements concluded between the State and a foreign investor or investors. In the

1990s there were such risks in certain CIS countries, like Azerbaijan, and as a result

petroleum agreements with foreign investors have been approved by Parliament with

the intention of giving them the status of a law and thereby granting stability to them.

This practice of enacting contracts into laws is also evident in Egypt and Chad, as

well as other countries.

Of course, such Parliamentary approvals and any other legislative protections are

capable of being changed at a later date, and might therefore be thought to have

limited value (see the section below: ‘Can the State Bind Itself by Contract?’).

However, the idea behind this approach is that contractual mechanisms offer a greater

degree of security for the investor. The law might therefore be contractualised. For

example, in Chile, a petroleum law provided that the legislative regime, the

advantages, exemptions and taxation benefits which are applicable have to be

recorded in the operating agreement and will not vary throughout the duration of the

contract34.

It is debatable whether contractual legislative mechanisms offer a greater degree of

security than do mechanisms provided for in the applicable law. The possibility of

future changes in law can negatively impact upon the foreign investment contracts in

the same way as it can negatively impact on already enacted laws. Moreover, most

arbitral awards suggest (see Chapter 4) that the IOC will be entitled to damages if the

host government breaches the agreed arrangements (whether formalised in law or

contract) that the IOC reasonably relied upon to conduct its business (estoppel). The

IOC would however have the obligation to perform due diligence. Indeed, if the

performance of reasonable due diligence would have shown that the law or contract

relied upon would not be enforceable under the applicable law, the IOC’s reliance on

either the law or the contract would not be treated as justified (see the discussion of 34 Decree-Law No. 1089 (1975) Art 12.

39


the Metalclad case below). It may also be noted that in some Civil Code countries (for

example, the Ukraine), such an ‘incorporation by reference’ approach with respect to

exemptions (of laws other than the petroleum law) might not be enforceable if they

attempted to include so-called imperative laws such as a general environmental law.

In such a legal context, any such exemptions would have to be placed in the

petroleum law itself, and would normally apply to laws that were enacted earlier in

time than the petroleum law.

3.2.6 Stability and BITs

There are other mechanisms for stabilisation that are to be found in international

conventions such as bilateral investment treaties (BITs). In BITs the guarantees for

stabilisation could take the form of guarantees in relation to freely convertible

currencies for transfers linked to investments. The exact language providing for

stabilisation would be important however, with the host government guaranteeing a

right, or providing for a particular regime (or portion thereof) to be ‘frozen’, or

provides for the result of the host government imposing additional obligations, or

diminishing the IOC’s rights. In another respect, BITs can be important. They may

lend Treaty status to stabilisation provisions contained in a host government’s

petroleum regime by way of the ‘fair and equitable treatment’ provision that is

contained in most BITs, or by means of the language that only some BITs have. For

example, a requirement that the host government “shall observe any obligation it may

have entered into with regard to investments of nationals of the other Contracting

Party”35. Such ‘obligations’ could be imposed by way of a law or by way of a foreign

investment contract.

Where the IOC does not enjoy a right to apply international law as the governing law

of the contract by means of an applicable treaty, it may make an effort in negotiations

on the petroleum contract to stipulate international law as the governing law of the

35 The Gambia-Netherlands BIT (2002) at Article 3(4).

40


contract instead of the domestic law of the host country (which is what the majority of

petroleum contracts continue to provide for).

3.2.7 Stability and Hardship

The view of stabilisation in the preceding sections may be seen as narrow by some

writers. It is principally concerned with stabilisation provisions that are designed to

effectively maintain the position of the IOC as described in the relevant petroleum

contract. It does not include force majeure or hardship, which may be viewed by

some as agents for stabilisation36. However, it might be more appropriate to view

them as providing justifications for non-performance, allowing the IOC justification

for loosening its position.

This was the case in a number of `transitional’ countries that have emerged from the

former Soviet Union such as Russia, Kazakhstan and Azerbaijan. It may also apply to

a number of developing countries.

3.3 Stabilisation and cross-border pipeline projects

There are a variety of intergovernmental and specialist organisations that have been

involved in designing model provisions for possible use in negotiations and as

guidance as to good international practice in particular economic activities. The AIPN

is a notable example of this37, but the OECD and UNCITRAL have also been active

in this respect in international investment law. The idea is usually to provide a

template of prescriptive clauses that are designed to reflect generally accepted

36 Bertrand Montembault, see note 1 above. The distinction between these concepts is not as clear as it once was; UNIDROIT essentially merges the concepts of force majeure and hardship, stipulating the percentage by which the cost of performance has to go up before such a cost increase would constitute an excuse for non-performance. An example of hardship is Article 17.1 of the Russian PSA (1996) which provides that “amendments to the agreement shall be allowed only by consent between the parties, as well as upon request of one of the parties in case of a significant change of circumstances as defined by the Civil Code of the Russian 37 Volume 2 of the AIPN Host Government Agreement Handbook (forthcoming) will address inter alia stabilisation issues in petroleum contracts.

41


practices. Obviously, this is not legally binding. An area of note where stability

clauses are being developed in models is that of inter-state or cross-border pipelines

for oil and/or gas.

In this respect, we may note the development of an Inter-governmental Agreement

(IGA) and a Host Government Agreement (HGA) by the Energy Charter Treaty

Secretariat. The former represents a ‘treaty model’ governed by public international

law, which deals mainly with horizontal issues that concern the pipeline infrastructure

as a whole. The latter deals mainly with vertical issues that concern the project

activity within the territory of each State involved in the pipeline project. It provides a

template for an agreement between each of them and the project investor. It contains

inter alia a model clause on economic stabilisation. It reads:

“The Host Government shall take all actions available to them to restore the

economic Equilibrium established under this Agreement and any other

Project Agreements if and to the extent the Economic Equilibrium is disrupted

or negatively affected, directly or indirectly, as a result of any change

(whether the change is specific to the Project or of general application) in

[name of country] law (including any laws regarding Taxes, health, safety and

the environment) occurring after the Effective Date, as applicable, including

changes resulting from the amendment, repeal, withdrawal, termination,

expiration of [ ] law, the enactment, promulgation or issuance of [ ] law,

the interpretation or application of [ ] law, whether by the courts, the

executive or legislative authorities, or administrative or regulatory bodies),

the decisions, policies or other similar actions of judicial bodies, tribunals and

courts, the Local Authorities, jurisdictional alterations, and the failure or

refusal of judicial, bodies, tribunals and courts, and/or the Local Authorities

to take action, exercise authority or enforce [ ] law (a Change in Law)”38.

38 HG Agreement, Article 31.3. See Energy Charter Treaty Secretariat website: www.encharter.org

42


The language is likely to be too open-ended to appeal to many investors and there is

no guidance about how the economic equilibrium is to be restored. The concept of a

Change in Law in defined very widely in Article 31.2 as:

“any domestic or international agreement, any legislation, promulgation,

enactment, decree; or any other form of commitment, policy or

pronouncement or permission has the effect of impairing, conflicting or

interfering with the implementation of the Project, or limiting, abridging or

adversely affecting the value of the Project or any of the rights,

indemnifications or protections granted or arising under this Agreement or

any other Project Agreement”.

In practice, there have been several attempts to tackle the specificities of a cross-

border pipeline project, including the design of stability mechanisms. The roots of this

lie inter alia in the emergence of new regional energy markets and a growing concern

among governments for additional security of energy supply. The challenge has faced

investors in various regional settings, such as the West African Gas Pipeline Project

and the Baku-Tbilisi-Ceyhan (BTC) Oil Pipeline. The legal arrangements that resulted

contain interesting new approaches to stabilisation in cross-border pipeline projects,

and the sub-sections below make some comments on each of these two projects in this

respect.

3.3.1 The West African Gas Pipeline Project

The pipeline project commenced construction in 2005, on the basis of legal

arrangements that comprise an inter-governmental agreement (IGA)39 and a treaty to

which all of the participating nations are party40. The IGA contains some significant

stabilisation commitments. These are a little unusual, not least because the four States

(Benin, Ghana, Nigeria, Togo) each had to implement an entirely new, harmonised

39 West African Gas Pipeline Agreement: International Project Agreement, 22 May 2003 (author’s copy). 40 Treaty on the West African Gas Pipeline Project between the Republic of Benin, the Republic of Ghana, the Federal Republic of Nigeria and the Republic of Togo (author’s copy).

43


regime for this cross-border project, and the obligation of the developer was

contingent on that regime being implemented in each State. Moreover, the

stabilisation commitments extend well beyond the fiscal regime. Essentially, the

agreement sets out in some detail the new regime to be implemented (the “Agreed

Regime”41), which includes an “Agreed Fiscal Regime”42 (an entirely new fiscal

regime applying to the project as a whole, without regard to the international

boundaries), but it also includes other investment regime features including exchange

controls, foreign investment rules and regulatory control over the pipeline.

Once the Agreed Regime has been implemented, and the developer is committed to

construction, the States thereafter are contractually liable to the developer to pay

damages for `Regime Failure’: that is, any deviation away from that Agreed Regime.

Clause 36.1 gives an extensive definition of Regime Failure, resulting in a limitation

on the potential for disputes regarding interpretation of regime failure. This includes

the following eventualities:

• a decision of a court or tribunal that the Agreed Regime or part of it is not in

force or is not valid;

• the coming into force in a State of a law, as a consequence of which the Agreed

Regime or part of it ceases to be in force or maintained;

• the entering by a State into any international agreement or similar or other

commitment that conflicts with, impairs or interferes with, or adversely affects

such State’s performance of or ability to perform its obligations under the Treaty

or agreement or implementation of the project.

In the event of a Regime Failure, which results in a material adverse effect on the

Company, certain remedies are provided. In the case of a decision by a court or

tribunal, the State or States concerned are required (under 36.2(b)) to make their `best

endeavours’ to appeal the decision to reinstate the agreed regime. Otherwise, the

States are required to meet with the Company at its request and “endeavour in good

faith to negotiate a solution which restores the Company and/or its shareholders to the

41 Clause 7. 42 Clause 29, and Schedule 8.

44


same or an economically equivalent position it was or they were in prior to such

change” (36.2(a)). This is equivalent to the economic balancing with a strong

negotiating element discussed in Section 3.2.2 above. A failure to comply by the State

triggers a compensation requirement in Clause 36.4.

The fiscal stabilisation is a part of this, but it is not quite the same as the other parts.

In the case of the fiscal regime, the States undertake not to take any executive,

regulatory or legislative action that amounts to a violation of the treaty regime.

However, it is agreed that the States are free to change some aspects of it (including

the most important components like the tax rate) after 20 years, and therefore a

change after that time is not an instance of Regime Failure. However, the States do

commit that they will maintain the harmonisation between the States, so if one of the

States unilaterally changes an element without the others also changing, that would

amount to Regime Failure.

The linkage of the IGA to the Treaty is notable since the latter is governed by

principles of international treaty law and in particular, by the Vienna Convention on

the Law of Treaties of 1969. The stability measures under the Treaty might therefore

be expected to enjoy a higher legal status than those under host government-company

agreements as a treaty is usually ‘insulated’ from unilateral actions of the host

government that may amount to a breach of contract or an abrogation of contract.

Therefore, any claim under the agreement can be espoused at the international level

by virtue of the treaty protection. However, this implication of ‘freezing’ may be

more apparent than real. The same result – enforceability - may also be attainable in

the absence of a treaty under the petroleum regime of one of the host governments if

international law was provided as the governing law, and other provisions were

included in it (waiver of sovereign immunity from execution and an appropriate

arbitration clause, for example).

45


In addition to the above, the States undertake not to expropriate or nationalise the

assets of the company43. However, this is in practice not enforceable, since a State

may expropriate under international law, and indeed there may be provisions in the

States’ Constitutions that would facilitate such action within each State’s own

borders. The issue would be the applicable quantum of damages. This legal

undertaking is not a convincing step towards enhancing the stability of the pipeline

agreement by protecting the company from unilateral actions of the States parties,

although it may have a certain moral authority. The same Clause provides in the next

paragraph – more realistically – that in the event of an ‘Expropriation Event’

occurring, the State or States taking such action shall make “prompt, adequate and

effective compensation” under public international law to the company or companies

affected by the expropriation or nationalisation44. The result of a breach of the first

paragraph (an Expropriation Event) may therefore be enforceable.

With respect to future amendment, the Agreement requires consultation with the

operating company prior to any amendment and makes provision for periodic review

and amendment with the parties’ consent. This recognises the likely need for

adjustment of the contractual relationship in the face of changing circumstances.

3.3.2 The BTC Pipeline Project

The BTC pipeline project is a highly complex example of a cross-border project

involving an integrated approach to stabilisation between the pipeline project and the

upstream petroleum developments in Azerbaijan’s Caspian Sea area (ACG). No less

than 78 parties were involved in BTC, with 208 finance documents and 17,000

signatures on them45.

43 Clause 35. 44 Clause 35.2. 45 See the documents at www.caspiandevelopmentandexport.com. For a very different experience of pipeline regime design including the provision of a stability regime, see the account by Steve G Forsyth and Vianney Boiteau: ‘Chad-Cameroon Development and Pipeline Project Legal Issues, in International Energy Law and Taxation Review (2004), 112-123.

46


In the context of this study, only a few remarks are made that contribute to the subject

of this section. Host Government Agreements were signed by the project consortium

and the respective host governments (Azerbaijan, Georgia and Turkey). They contain

similar but not identical provisions on stabilisation. The HGA binds the parties but

also binds state authorities generally. A number of themes already discussed appear in

the context of the Host Government Agreements: economic equilibrium,

expropriation and compensation, but are dealt with in a fairly sophisticated way.

With respect to economic balancing, the Azeri HGA requires the State Authorities to

“take all actions available to them to restore the Economic Equilibrium established

under the Project Agreements if and to the extent that Economic Equilibrium is

disrupted or negatively affected, directly or indirectly, as a result of any change…”46

This obligation includes the obligation to take all appropriate measures to resolve

promptly by whatever means may be necessary “any conflict or anomaly between any

Project Agreement and such Azerbaijan Law”.

The provision on compensation in Article 9 is quite specific and focuses upon the

result of a breach. A failure to maintain economic equilibrium is expressly provided

for as a trigger for an obligation to pay monetary compensation. It adds that the

obligation of the Government extends to loss or damage caused by or arising from

any person which was a state entity at the time the applicable project agreement was

executed by it. It also spells out in detail the kind of monetary remedies appropriate to

compensation: money damages; restitution, reimbursement and indemnification.

Moreover, the possibility of expropriation is expressly anticipated. Instead of striking

a moral note that it should never happen, it states:

46 Host Government Agreement between and among the Government of the Azerbaijan Republic and the State Oil Company of the Azerbaijan Republic, BP Exploration (Caspian Sea) Ltd., Statoil BTC Caspian AS, Ramco Hazar Energy Limited, Turkiye Petrolleri A.O., Unocal BTC Pipeline Ltd., Itochu Oil Exploration (Azerbaijan) Inc., Delta Hess (BTC) Limited, 17 October 2000, Article 7.2(x). The other HGAs appear to be identical in wording.

47


“In the event that the State Authorities should ever carry out any act of Expropriation

with respect to the Project, the State Authorities shall do so only where such

Expropriation is (i) for a purpose which is an overriding public purpose, (ii) not

discriminatory, (iii) carried out under due process of law and (iv) accompanied by the

payment of compensation as provided”47.

“Due process” in respect of a claim is to include the parties’ right to resort to

arbitration under the Agreement to (1) establish that an expropriation has taken place

and (2) to assess the amount owed by the State Authorities as adequate compensation

for loss or damage arising from the expropriation.

Finally, it may be noted that State authorities are defined in Article 15 (Binding

Effect) to include the Government, all State entities and all local authorities.

Moreover, this applies “notwithstanding any change in the constitution, control,

nature or effect of all or any of them and notwithstanding the insolvency, liquidation,

reorganisation, merger or other change in the viability, ownership or legal existence

of the State authorities (including the partial or total privatisation of any State

entity)”. This is strengthened by a further provision in Article 20.2, in which the

parties acknowledge that it is their mutual intention that no law (this is described as

variously, Azeri, Georgian or Turkish in the respective HGA) now or in future, or the

interpretation or application procedures of such law, if that should be contrary to the

terms of the HGA or any project agreement, “shall limit, abridge or affect adversely

the rights granted to the MEP participants or any other project participants in this or

any other project agreement”. Such a law is also precluded from amending, repealing

or taking precedence over the whole or any part of this or any other project

agreement. It is hard to see how this particular obligation would be enforceable

however.

3.4 Can the State Bind Itself by Contract?

47 Article 9.4.

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At its boldest, the aim of a stabilisation clause is to ensure that the terms and

conditions of a contract (and their effects) are ‘frozen’ from the time of signature over

the life of the contract. However, this is a view that most stabilisation clauses would

be unable to achieve in practice. A State may take necessary regulatory measures

which are not arbitrary or discriminatory even where these diminish the value of

petroleum agreements. This is a principle established in international law48. However,

the real issue is not so much whether the host government can unilaterally change the

contractual relationship but rather what is the result of such legislative action in terms

of lump sum damages or possible specific performance of stabilisation mechanisms.

The legislative or regulatory action may trigger a form of indemnification in a

stabilisation clause.

If rights under an agreement made with a foreign investor are viewed as a form of

property, then the legal issue in a particular case will be whether interference by a

State with these rights amounts to expropriation, for which the State may incur

responsibility if appropriate compensation is not paid. In this context, there is a

distinction to be drawn in international law between lawful and unlawful

expropriation49. However, the principal difference in practice is the quantum of

damages such as book value or net book value versus some element of lost profits50.

Moreover, if a host government does not pay ‘appropriate compensation’ it may have

the responsibility to pay a higher quantum of damages. The principal aim of the IOC

in providing for an expropriation provision (in addition to a stabilisation mechanism

for ‘creeping expropriation’) is to stipulate a high quantum of damages applicable in

the event of any kind of expropriation, whether lawful or unlawful. This would be

drafted in line with normal BIT language on this: market value prior to the news of

the expropriation reaching the marketplace, along with normal commercial interest.

48 For example, Brownlie, `Principles of Private International Law’; Mann, `State Contracts and State Responsibility’, in his `Studies in International Law’ (1973), 302-26. 49 There are several arbitration cases that have discussed this, including BP v Libya (1979); LIAMCO v Libya (1981); AGIP v Congo (1982) and Amoco International Finance v Iran (1987)(see note 5 above). Essentially, expropriation is unlawful if it is discriminatory, if it is not motivated by the public interest of the expropriating country, if it breaches stabilisation clauses of the parties’ contract, or if no compensation is paid, offered or other provision is made for it. 50 DR Bishop, ‘International Arbitration of Petroleum Disputes: the Development of a Lex Petrolea’ (author’s copy).

49


A question that has commonly been asked is whether a State can indeed fetter itself

by the conclusion of a contractual clause in a long-term agreement. Based on a review

of the ‘expropriation awards’ from the 1970s and 1980s, and of the more recent

arbitral awards, it appears that a host government can indeed fetter itself to a

stabilisation provision. Although it has the sovereign power to unilaterally revise its

relationship with the foreign investor, the result of a stabilisation mechanism which

applies to such unilateral action is that the host government would have to pay lump

sum damages.

It may be noted that in a few cases the petroleum contracts may be ìnternationalised’

by arbitral tribunals in the absence of the governing law containing an element of

international law. The inclusion of a stabilisation clause may be seen as evidence of

the intention of a state party to the agreement not to subject the contract to the

domestic law of the State but rather to some external system of authority. The latter

would ensure the validity of the stabilisation clause and the contract of which it is a

part. However, the IOC has the obligation to perform reasonable due diligence and the

stabilisation must appear to be enforceable under the laws of the host government on

the effective date of the petroleum contact. In this respect, the stabilisation clause may

play an important role in allowing the inference to be drawn that a foreign investment

contract is not subject to the domestic law of the host state.

On balance then, the value of an enforceable stabilisation clause remains significant in

spite of the limitations imposed by the risks of unilateral state action. The key word

here is ‘enforceable’. The stabilisation mechanism may be provided for in a law (say,

a foreign investment law) or ‘contractualised’ by way of a law referencing the

petroleum contract (as in certain Central Asian countries) or it may be in the

petroleum contract itself. However, it must appear to be enforceable under the

domestic law of the host government on the effective date of the foreign investment

contract as a result of reasonable due diligence. This enforceability applies to the

result of the unilateral change imposed by the host government. While other

considerations would have to be taken into account in designing a fully effective

50


stabilisation mechanism, the essential point here is that it can have value as a response

to unilateral state action.

3.5 Summary

• A number of countries still provide for stability in the form of ‘freezing’

obligations in the contract. However, given the high risk of unilateral action at

some future date this is in itself a highly unreliable mechanism. Perhaps in

recognition of this, the long-term trend has unmistakeably been one in which

economic balancing has been favoured, often involving negotiations between the

parties about the result.

• An open-ended approach to negotiated economic balancing however is also a

high risk strategy. It should be complemented by details and penalties for non-

compliance: imposition of time limits on negotiations, recognition that

compensation must follow a loss or damage and recourse to arbitration if the

negotiations fail.

• In a number of cases the NOC will play a central role in fiscal stabilisation. It

may provide for adjustment by paying any additional taxes out of its share of

profit petroleum or royalty under a PSA or it may reimburse the IOC directly out

of general revenues. Under a rate of return system, the NOC could pay from its

share of royalty and/or excess profits tax. However, the NOC share of production

may prove insufficient or it may be pre-sold.

• The object of an economic balancing provision is not to address an act of

expropriation by the host government but other approaches to stabilisation do

take this into account. A more difficult area is the impact of an act of ‘creeping

expropriation’.

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• States can revise contracts unilaterally. The real issue in designing the

appropriate stabilisation mechanisms is not so much whether the host government

can unilaterally change the contractual relationship but rather what is the result of

such legislative action for the investor in terms of lump sum damages or possible

specific performance of stabilisation mechanisms.

• The growing interest in cross-border pipeline projects is generating new

approaches to stabilisation involving a more complex set of legal arrangements. It

is too early to say whether such arrangements are as effective as they are

innovative in their approaches to fiscal stability.

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Chapter 4: Enforcement of Stabilisation Provisions

4.1 The Old and the New

The jurisprudence relevant to enforcement of stabilisation clauses may be rather

crudely divided into two categories. On the one hand, there are the ‘classical’ cases,

dating from the 1970s and 1980s, which address stabilisation clauses as instruments

for freezing contact terms for the life of the contract, and which are much discussed in

the literature on international investment law and in oil and gas law manuals51. On the

other hand, there are a number of published arbitral awards in recent years that

address issues of fair and equitable treatment and indirect expropriation which by

analogy have a bearing on the likely enforceability of modern stabilisation clauses. As

we have seen in Chapter 3, the modern trend is for stabilisation clauses to provide that

if governmental action adversely affects the economics of the project to the investor,

the terms of the contract will be adapted to restore the financial position of the

investor to that on the effective date when the contract was signed. As one informed

commentator has noted, “No published international arbitration awards have dealt

with this type of stabilisation clause”52.

With respect to the modern form of stabilisation (which has many forms and which

may be combined with freezing), it is probably helpful to consider by way of analogy

the category of reported awards as indicated above. However, a survey of the latter

group of cases suggests a very different and more complex approach may be required

than that required by the classical cases (not that those cases displayed a strong

51 For example, ‘International Petroleum Transactions’ (2nd ed)(2000), by EE Smith, JS Dzienkowski, OL Anderson, GB Conine, JS Lowe and BM Kramer; see chapter 5: Assessing Political and Economic Risks in an International Energy Transaction, 338-391. Many of the articles in the Select Bibliography discuss these ‘classical’ awards. 52 Doak Bishop, ‘Survey of Published International Arbitration Awards Involving the Petroleum Industry: the Development of a Lex Petrolea’, 2002 Rocky Mountain Mineral Law Foundation International Energy and Minerals Arbitration Mineral Law Series 2-25 (2002).

53


consistency or homogeneity of approach). The recent cases also reflect the advent of

more professional dispute settlement bodies such as the International Centre for the

Settlement of Disputes (ICSID), rather than the ad hoc tribunals that figured largely in

the classical awards. Such bodies are specifically focussed on settling disputes which

arise from foreign investment transactions involving States and private parties.

There are other contextual differences of note. The classical awards addressed

disputes arising from an international petroleum industry that bears only a passing

resemblance to the one we have today. The producer-consumer dynamics have

changed but more importantly there are new market players both as producers

(Kazakhstan, Azerbaijan, Russia and several African States, for example) and as

consumers (China and India for example). The latter group appear to be willing to

conclude contract terms that differ from those offered by traditional players in terms

of incentives for host countries. The players themselves (the IOCs) have changed and

the current generation of IOCs is learning to live with both NOCs in the host countries

and globally operating NOCs as competitors53. Above all, the market place for

stabilisation provisions has changed dramatically, with a growth in hybrid forms of

stabilisation provision between the classic ‘freezing’ kinds on the one hand and the

economic balancing variety on the other.

4.2 The Classical Awards

A review of the leading arbitration awards from the 1970s and 1980s shows that

tribunals have on several occasions ruled in favour of the validity of stabilisation

clauses, such as in the Agip v Congo, BP v Libya, Liamco v Libya and TOPCO v

Libya cases54. However, the focus of the stabilisation clauses concerned was to ensure

that the concession contracts were operative for the full term provided in the contract,

and so targeted expropriation (or a similar confiscatory measure) as the ‘event’ to be

prohibited.

53 An excellent overview of these and other changes in the international oil market is contained in Paul Stevens’s paper, ‘Oil Markets’, Oxford Review of Economic Policy, vol.21, 19-42. 54 See note 5 above.

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In the Libyan concession at the core of the TOPCO v Libya55 arbitration, the host

government was required to “take all the steps that are necessary to ensure that the

Company enjoys all the rights conferred upon it by this concession, and the

contractual rights expressly provided for in this concession shall not be infringed

except by agreement of both parties”. The clause was to be interpreted according to

the laws and regulations in force at the time of the concession award, and no

amendments were to be made without the Company’s consent. The tribunal decided

that the host government could not exercise its sovereignty to nationalise in violation

of its specific contractual commitments in the stabilisation clause, and that the

nationalisation was in breach of the concession.

In the case brought by AGIP against the Government of the Congo56, the Company

relied upon a guarantee of stability for the subsidiary’s legal status and not to apply

any laws or decrees that would alter the Company’s legal status. An ICSID tribunal

found that the nationalisation of AGIP’s subsidiary was inconsistent with the

stabilisation clauses and gave rise to an obligation to compensate AGIP in full.

In the much discussed Aminoil57 case, stabilisation clauses were again at the centre of

a case involving expropriation. The concession provided in Article 17 that it could not

be annulled or altered by legislation or regulations unless jointly agreed. A

Supplemental Agreement of 1961 also provided that the concession could not be

terminated before the end of its term except by surrender or by default. The tribunal

held that the purpose of the stabilisation clauses was only to prohibit any measures of

a confiscatory character. The clauses were held to create legitimate expectations with

respect to damages and those had to be taken into account.

In a later case, before the US-Iran Claims Tribunal, a contract involving Amoco

International Finance58 was at the core of a dispute, and was alleged to contain

55 See TOPCO v Libya (1978), see note 4 above. 56 AGIP v Congo (1983), see note 5 above. 57 Kuwait v AMINOIL (1982), see note 5 above. 58 Amoco International Finance v Islamic Republic of Iran (1987), see note 5 above.

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stabilisation clauses. The first of these was held by the tribunal to provide no

guarantee for the future and was not a stabilisation clause. The second, contained in

Article 21.2, provided that no measures could be taken to annul, amend or modify the

contract unless by mutual consent. The tribunal held that this created a principle of

interpretation and implementation of the contract in a cooperative manner but did not

bind Iran because the host government was not a signatory to the contract. It was not a

stabilisation clause. In the tribunal’s view, any contractual limitation on a State’s right

to nationalise must be expressly stipulated, be within the State’s regulatory powers

and should cover only a relatively limited period of time. The nationalisation was held

not to be unlawful.

The significance of the above awards for the modern investor is questionable. Not

only has the context changed: the risk of full-scale nationalisations has become much

less to an IOC than the risk of more subtle forms of unilateral action by host

governments (creeping expropriation). There is also general acceptance that under

customary international law States have the right to expropriate the property of

foreign investors59. This is subject to four conditions: the expropriation must be

undertaken for a public purpose; it must be non-discriminatory; it must comply with

principles of due process of law, and compensation for the expropriation must be paid

to the foreign investor. In this context, the classic stabilisation clause appears to be of

much less relevance. It is hardly surprising then that modern stabilisation clauses

favour some form of economic balancing or at least a hybrid of this with some of the

traditional elements of freezing.

4.3 Stating the Obvious: Due Diligence

If an investor elects to take action to enforce a stability clause in the face of a

unilateral legislative or regulatory measure by the host government, an initial test

59 See L Yves Fortier and Stephen L Drymer, ‘Indirect Expropriation in the Law of International Investment: I Know it When I See It’, 19 ICSID Review – Foreign Investment Law Journal 293 (2004). This is perhaps the best source containing a thorough analysis of all recent awards until the date of its publication. We may note the decision in LIAMCO v Libya that restitution of the contract is not available since it could only take effect by rescinding the nationalisation itself.

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concerns proof that the investor has taken the appropriate steps with respect to due

diligence. The recent ICSID case of MTD Equity v Republic of Chile60 underlines the

importance of this – perhaps rather obvious – first step in making a case.

If one reads the portion of this award relating to the foreign investor’s obligation to

perform due diligence, one acquires some idea about the burden of proof on the

foreign investor. If the latter did not make the necessary effort to understand what the

legislative/contractual regime was in regard to the right that it thought that it had

acquired, then the foreign investor cannot be considered as having justifiably relied

upon such a right being available to it, as an essential part of its decision to invest.

The relevant part of the MTD award61 states that the Claimant company showed a

lack of meaningful due diligence in making its investment in Chile. It relied on self-

serving statements by a prospective business partner and failed to carry out the most

rudimentary of inquiries. The Respondent contrasted the practices of MTD with those

followed by other foreign investors. It was alleged that MTD was quite unfamiliar

with the host State’s business environment, had not secured the resources and services

needed to implement the project and had not commissioned a feasibility study worth

the name. The foreign investor was also alleged to have taken at face value statements

made by an intermediary that land use restrictions could be modified and failed to

carry out any further investigation to prove their validity. A piece of land it wished to

purchase was valued for the foreign investor but the latter failed to examine that

valuation critically. Indeed, an examination of a very basic kind would have revealed

its shortcomings (failure to conduct reasonable due diligence and consult with an

urban planner, environmental expert, architect or lawyer with experience in real estate

development issues). It appears that the foreign investor was in a hurry to start the

project and overlooked the necessity of taking the above precautions.

The tribunal concluded that the foreign investor should bear the consequences of its

own actions as a group of experienced businessmen. Their choice of partner,

60 44 ILM 91 (2005). 61 Para. 116 et seq.

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acceptance of a land valuation based on future assumptions without protecting

themselves contractually in case the assumptions would not materialise, are all risks

that they took irrespective of Chile’s actions62.

Among the more complex areas for attention in this respect is the role of

understandings or assumptions about common practices. Where it has been common

practice for example for the NOC to absorb the cost of any additional fiscal

obligations imposed by the host government, it would be important to ensure that

such a government practice or understanding thereof was documented, that the host

government had confirmed it and that this understanding played an important role in

the decision to invest in the first place. If a dispute arose, since the IOC had justifiably

relied upon the ‘agreed upon’ interpretation of a practice (or law, regulation, etc.) to

its detriment, the government may be estopped from later taking the position that the

practice should be interpreted differently than had been ‘informally agreed’

previously.

4.4 Indirect Expropriation

The dearth of published arbitral awards that directly concern the enforcement of fiscal

stabilisation provisions (at least in recent years) means that we need to consider the

body of international arbitral awards that are relevant to anti-expropriation provisions

and to proceed by way of analogy. The cases below may not be immediately familiar

to some oil and gas practitioners and so they are described in some detail.

There are a number of recent cases in which there appears to be no evidence of a

direct seizure of assets by the State63. At the outset, however, it should be noted that

there is much disagreement about the significance of the following decisions64. There

62 Para. 178. 63 The notion of ‘creeping expropriation’ in the petroleum industry is not completely new however: see Sedco, Inc. v National Iranian Oil Co.(NIOC), Award No ITL 55-129-3 (28 October 1985), 9 Iran-US CTR 248; Phillips Petroleum v Iran, 21 US-Iran CTR 79.. 64 For a review of the principles of international investment protection in relation to these cases, see Chapter 6 of N Rubins and NS Kinsella’s International Investment, Political Risk and Dispute

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are several doctrines of expropriation that are applied by arbitrators65 and not applied

with a scholarly neatness. For our purposes, the key point is that the awards have not

found a host government responsible for expropriation, which suggests that investors

should be as wary of relying on a defence of indirect expropriation as on direct

expropriation.

4.4.1 Metalclad

The best starting point is the case of Metalclad Corp v United Mexican States (2001)

since it has had a significant impact upon other cases66. The panel in that case stated

at Paragraph 103 that expropriation includes:

“not only open, deliberate and acknowledged takings of property … but also

covert or incidental interference with the use of property which has the effect

of depriving the owner, in whole or in significant part, of the use or

reasonably-to-be-expected economic benefit of property even if not

necessarily to the obvious benefit of the host State…” (Author’s italics).

This case – and the above remarks – touches on an important issue raised by the so-

called ‘effects’ doctrine. What is the threshold level of interference that will trigger

State liability for expropriation? Governmental measures that result in the total

destruction of investment value are easily classifiable as expropriation. However, a

claim will be much harder to maintain when most of the value of the investment

remains.

In Metalclad a US investor had acquired land in Mexico for use as a landfill. The

company had obtained assurances from the federal government that all necessary

permits had been issued but the local authorities had refused to grant permission to Resolution: A Practitioner’s Guide (2005), Oceana Publications, New York, 189-259. See also the OECD Working Paper, ‘”Indirect Expropriation” and the “Right to Regulate” in International Investment Law’, No. 2004/4, September 2004. 65 In particular, the doctrines based on effects, purpose, proportionality and legitimate expectations. 66 Metalclad Corp. v. United Mexican States, Award (ICSID (Additional Facility) Case No. ARB (AF)/97/1, Aug. 30, 2000, 16 ICSID Rev.-FILJ (2001), 168.

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begin construction. Work on the new facility, which included a clean up of the

residues left by the previous operators, was completed in March 1995 but opposition

from local interests intensified and ultimately the municipality denied Metalclad’s

construction permit in a process that was closed to Metalclad. The Tribunal concluded

that the host government’s actions had deprived Metalclad of the ability to use its

property for its intended purpose, and that this was sufficient harm to constitute

expropriation. It also faulted the lack of transparency in the Mexican legal system for

siting of hazardous waste disposal facilities. The Tribunal identified standards to the

effect that there must be a deprivation, that it had to affect at least a significant part of

the investment and that all of it relates to the use of the property or a reasonably

expected economic benefit. Little importance was placed on the justification provided

by the host State for its action that was considered to be equivalent to expropriation.

Although this has been an influential case, there is one limitation to the significant

interference threshold that it articulated. The test was included in dictum by the Panel

since in practice the investor’s landfill enterprise was completely prevented from

operating and therefore determined to have lost all value. In other situations it might

not be so easy to apply the Metalclad formula in order to identify the level of damage

to investment that qualifies as “substantial”.

4.4.2 Occidental v Ecuador

Another case on indirect expropriation concerned an oil company. In Occidental

Exploration and Production Co. v Republic of Ecuador (2004)67, the Claimant argued

that the host State’s refusal to refund VAT payments constituted an expropriation of

its investment: that is, the claim to receive reimbursement. The Tribunal ultimately

found that no expropriation had occurred, although it did conclude that Ecuador

had violated its duty to accord Occidental (OEPC) fair and equitable treatment.

With respect to the claim that expropriation had taken place, the Tribunal relied on the

67 Occidental Exploration and Production Company v. The Republic of Ecuador, Final Award, LCIA Case No. UN3467 of 1 July, 2004, 43 ILM 1248 (2004).

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Metalclad case and noted that the deprivation to the company had to affect a

significant part of the investment, which was not apparently the case here68.

Taking a closer look at the issues in this case, we see the following. The dispute arose

because of the actions of the Tax Office (SRI) which passed several Resolutions that

resulted in the oil company, OEPC, not being able to recover VAT paid on local

purchases and on the import of goods made in connection with export activities. The

oil company assumed virtually all of the costs of its exploration and exploitation

activities and had to pay VAT on expenses it incurred. The question of any refund of

VAT is not dealt with expressly in the contract. In return for providing its services

OEPC received a percentage of the oil produced and it was enabled to export that oil.

In the participation agreement there is a method for the calculation of the contractor

participation which includes a mechanism called a Factor X. This was calculated

using an elaborate formula and once computed it was to be multiplied by the

production figure and then divided by 100. That exercise produced the proportion of

the total oil production to which OEPC was entitled under the participation

agreement.

OEPC argued that when the participation agreement was being negotiated, a critical

element in reaching agreement on the formulation of Factor X and so the level of

participation by OEPC in the production of oil from the relevant block was the

parties’ joint understanding on how the VAT payments would be treated. OEPC

argued that its investment was based on an agreed economic model by which VAT

would be paid by OEPC but would then be reimbursed by the Ecuadorian authorities,

a claim that was challenged by the host government. OEPC argued that Ecuador’s

refusal to refund the VAT constituted a breach of its BIT obligations inter alia in

terms of its obligation to afford equal treatment to that of other investors, both

domestic and foreign in like circumstances; to grant fair and equitable treatment and

not to expropriate an investment either directly or indirectly.

68 The second stage of proceedings in this case in the English courts involved an arbitration held under the Arbitration Rules of UNCITRAL with the seat of arbitration in London: The Republic of Ecuador v Occidental Exploration and Production Company, LCIA Case No. 04/656 (2 March, 2006)..

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The precise way in which the mechanism in the petroleum agreement was triggered in

relation to VAT on imports was not considered relevant. What was relevant was that

there was a contractual provision to make corrections if tax changes have an impact

on the ‘economy’ of the contract. That is because the contractual mechanism assumes

and is intended to give effect to the underlying understanding of the parties as to what

the proper ‘economy’ of the contract must be. That provision creates an express

obligation to make a correction factor if the identified events have an impact on the

contract’s proper ‘economy’. Another provision in the OEPC contract (Clause 11.11)

stipulated a similar type of obligation to make a correction factor if there was an

unforeseen modification in the tax regime which has an impact on the economy of the

Contract. This presumes that the parties had considered and decided on what was ‘the

economy’ of the contract. It may also be noted that the question of what VAT would

be paid on items such as imports of equipment, machinery; materials and other

consumable supplies had been raised by OEPC during negotiations on the

participation agreement.

In the second stage of the proceedings in 2006 Mr Justice Aitkens held that the

dispute involved a matter of taxation not only in relation to the relevant BIT but one

that had reference to the performance of the obligations of the contract. He supported

this conclusion by three reasons. Firstly, the matter of the right to a VAT refund or

not had reference to the obligations of OEPC to do all that was necessary to exploit

the relevant block including the obligation to build all the systems needed for that

exploitation because the VAT was paid in respect of purchases made to fulfil that

obligation. Secondly, the issue of a VAT refund had reference to the performance of

OEPC’s contractual obligation to pay all taxes according to the laws of Ecuador.

Essentially, the dispute turned on whether that contractual obligation was concluded

on the assumption or understanding that there would be a refund of VAT paid.

Finally, the tax issue had reference to the underlying assumptions of the parties as to

the ‘economy’ of the contract which formed the basis for the bargain contained in the

contract’s terms. Therefore, the underlying assumptions of the parties as to the

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‘economy’ of the contract were fundamental to how the contract terms were to be

observed and enforced.

The Panel concluded that the VAT refund was not within Factor X as calculated

under the petroleum agreement and so OEPC was entitled to have it refunded under

Ecuadorian law. Because the refunds had not been made, Ecuador was in breach of its

obligation to accord OEPC a treatment no less favourable than that accorded to

nationals or other companies. The claim that OEPC’s investment had been impaired

by arbitrary measures was only upheld in part since the Tax Office (SRI) had not

acted deliberately to deprive the Company of the VAT refunds but rather this had

resulted from “an overall rather incoherent tax legal structure”. However, that

confusion and lack of clarity resulted in “some form of arbitrariness, even if not

intended by the SRI”. The arbitrariness had not given rise to any impairment of the

management, operation, maintenance, use, enjoyment, acquisition, expansion or

disposal of the investment of OEPC. The conclusion was that damage had been

caused and that OEPC could retain the VAT refunds it had obtained.

The approach to the expropriation issue in the first set of proceedings was influenced

by the Metalclad decision (and was expressly upheld in the second set of

proceedings). Although the claim that expropriation took place was ultimately

unsuccessful, the Tribunal did agree with OEPC that expropriation need not involve

the transfer of title to a given property: the distinctive feature of traditional

expropriation in international law. It may affect the economic value of an investment.

Taxes can have the effect of expropriating property as can other types of regulatory

measures. Indirect expropriation has significantly increased the number of cases

before bilateral investment tribunals. However, it had to meet the standards applicable

to such a wide definition of expropriation as were set out by the Tribunal in the

Metalclad decision.

4.4.3 Feldman

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There are other cases that address indirect expropriation and are potentially relevant

such as Feldman v Mexico (2002)69 and Pope & Talbot Inc. v Canada (2000)70. In the

first of these cases, the claimant sought compensation for tax rebates denied to his

products. However, the tribunal found that no expropriation had occurred because

some activities of the claimant remained unaffected by the practices at issue. The

Metalclad case was considered but it was noted that in that case the assurances

received by the investor from the host government were definitive, unambiguous and

repeated in stating that the government had the authority to authorize construction and

operation of hazardous waste landfills and that Metalclad had obtained all the

necessary federal and other permits for the facility. In Feldman the Mexican

authorities opposed the investor’s business activities at every step of the way, and

assurances relied upon by the claimant were “at best ambiguous and largely informal.

They were also in direct conflict with Article 4(III) of Mexico’s IEPS law requiring

the possession of invoices stating the taxes separately as a condition of receiving tax

rebates” (Para. 149). Similarly, a rather limited interpretation of the term ‘tantamount

to expropriation’ was given in Pope & Talbot, where a NAFTA tribunal found that

even if the investor’s argument could be accepted that the profits of the enterprise had

been significantly reduced by a change in Canadian lumber export quotas, it was

necessary to produce more tangible forms of interference in business operations

before it could be said that expropriation had occurred.

4.4.4 EnCana v Ecuador

A parallel arbitration to the one above with Occidental also involved a US company

and Ecuador was EnCana Corporation v Republic of Ecuador, which produced an

award on 3 February 200671. The issues involved were similar; the result of the award

was that EnCana’s claim to be the victim of indirect expropriation was rejected. It

69 Marvin Roy Feldman Karpa v United States of Mexico (2002), ICSID Case No ARB(AF)/99/1, Award. 70 Pope & Talbot Inc. v Government of Canada, Interim Award of 26 June, 2000, 40 ILM 258 (2001). 71 EnCana Corporation v Republic of Ecuador (2006), London Court of International Arbitration, Award & Partial Dissenting Opinion (Horacio A Grigera Naon)

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may be noted however that there was a dissenting opinion, which supported EnCana’s

case. Since this covers a number of issues that have already been discussed but treats

them rather differently, it is worth considering why.

Among the facts of this case it may be noted that the claims concern claims for VAT

refunds that arise out of the performance of four petroleum agreements in the host

country that were entered into by two companies before and after being acquired by

EnCana. As with the OEPD case above, there was a provision for amendment of the

tax regime in the petroleum agreement: a correction factor in the participation

percentages was to be included to absorb the increase or decrease of a tax charge or

labour participation. There is no express reference to VAT in the petroleum

agreement. The oil company argued that Ecuador had changed its interpretation of the

Hydrocarbons Law relating to exemption from various taxes imposed on imports

(three years after the petroleum agreements were concluded). The change in

interpretation occurred in 1997 and before that time the Law was interpreted as

meaning that no input VAT was chargeable on imports. Until March 2000 however

the oil company made no claim for VAT refunds. It appears that adjustment of the

agreement was sought by seeking to shift the burden to Petroecuador but the state

company rejected this on the ground that VAT refunds were a matter for the state tax

office. In relation to the host government’s failure to provide a tax refund, EnCana

made claims of indirect and direct expropriation of its investment.

The issue of indirect expropriation was viewed by the Tribunal as lacking substance.

The claim was that even if the subsidiaries had no right to a tax refund under the

municipal law, the denial of refunds had such a significant impact on the subsidiaries

as to be equivalent to expropriation of the investment. The Tribunal held that unless

there is a specific commitment from the host state, “the foreign investor has neither

the right nor any legitimate expectation that the tax regime will not change, perhaps to

its disadvantage, during the period of the investment”. Further, the Tribunal noted that

by its very nature all taxation reduces the economic benefits which an enterprise

would otherwise derive from an investment, and only in exceptional cases can a tax

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measure which is general in character be judged as equivalent in effect to an

expropriation of the enterprise itself.

The Tribunal discussed the effects of the denial of VAT refunds and the recovery of

VAT refunds wrongly made, noting that they did not prevent the company from

functioning profitably nor to engage in the normal range of activities of extracting and

exporting oil. The companies were not brought to a standstill, nor were the rewards

from their activities made so marginal or unprofitable that they lost their character as

investments. In their decision they referred to the much earlier case of Revere Copper

& Brass Inc v Overseas Private Investment Corporation (1978), which involved a

claim under the US foreign investment programme. In that case, the tribunal held that

various acts by the host government including tax measures amounted to a

repudiation of an investment agreement between Revere and Jamaica which

prevented Revere from exercising effective control over the use of disposition of a

substantial portion of his property. However, this case concerns the imposition of a

tax (the Bauxite Levy) that was in breach of an express tax stabilisation clause in the

investment agreement and involved a tax ranging from 15-35% on gross receipts. It

was not an income tax. The unreasonableness of the tax itself was not the basis for the

majority decision in favour of Revere, so that it did not support the argument that a

refusal to refund VAT amounts to an expropriation of the enterprise.

The Tribunal paid special attention to the dictum about expropriation as covert or

incidental interference (see Para. 9 above) in Metalclad to support its claim of

unreasonable interference with the ability of the Claimant to make use of and benefit

from their economic entitlements. It noted that Metalclad had nothing to do with

taxation and that from the point of view of expropriation; taxation is in a special

category. Only if a tax law is extraordinary, punitive in amount or arbitrary in its

incidence would issues of indirect expropriation be raised. The denial of VAT refunds

to the amount of 10% of transactions associated with oil production and export did

not deny EnCana the benefits of its investment in whole or in part. The claim that

indirect expropriation had taken place was rejected.

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A final issue which was examined by the Tribunal was whether the host government

action amounted to expropriation or conduct equivalent to expropriation of accrued

rights to tax refunds. The Tribunal considered the case of Waste Management Inc and

noted that it was concerned not with tax legislation but rather with a breach of

contractual rights by local government bodies. It noted the differences between

alleged governmental non-performance of contractual obligations and a governmental

refusal to make payments allegedly required by statute, in particular tax refunds. It

distinguished between a “questionable position taken by the executive in relation to a

matter governed by the local (i.e. municipal) law and a definitive determination

contrary to law”. Under the BIT, the executive was entitled to take a position in

relation to claims brought forward by individuals, even if that position turns out to be

wrong in law as long as it did so in good faith and is ready to defend its position

before the courts. To the extent that the host government contested the existence of

the obligations it was not repudiating them and one of its agencies was not

expropriating the value represented by a statutory obligation to make a payment or

refund by a mere refusal to pay. The Tribunal added a minimum set of conditions for

this: as long as the refusal was not merely wilful; the courts are open to the aggrieved

private party and the courts’ decisions are not themselves overridden or repudiated by

the State. It concluded that the policy of the tax authority on oil refunds never

amounted to an actual and effective repudiation of Ecuadorian legal rights.

The decision of the Tribunal was the subject of a lengthy dissenting opinion. Mr H A

Grigera Naon argued against the Tribunal’s insistence that a prior determination of

the validity of the host state’s objections to the grant of refunds was required from its

own courts and its own laws as a kind of ‘substantive’ exhaustion of local remedies

which constitutes a precondition for accessing substantive rights from the BIT Treaty.

Essentially, he concluded that EnCana had legitimate expectations under the BIT and

under Ecuadorian law that were violated by the state body, and that there was no need

to go through the courts to exhaust local remedies.

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4.4.5 CMS v Argentina

Another case that is relevant in this context is CMS v Argentina72. There, the claimant

demonstrated that the Argentine Government’s freeze of gas transportation tariffs and

forced conversion of private service contracts from dollars to devaluated pesos at a

one-to-one rate had the effect of massively reducing the local investment vehicle’s

profitability. The Tribunal calculated that the claimant’s investment had lost about

98.5% of its value. The Tribunal found that Argentina’s actions had violated other

standards of protection contained in the relevant BIT, but the Tribunal declined to

hold that it was liable for expropriation of the investment. The Argentine Government

demonstrated that the list of issues to be taken into account for reaching a

determination on substantial deprivation was not present in the dispute. The case

supports a view that other arguments are likely to prove a more reliable basis for a

claim that one based on a claim that a host government’s action has been ‘tantamount

to expropriation’. There is evidence in the above cases of such arguments however.

Another element in the CMS Gas Transmission Case may be noted. In that case,

Argentina relied on the explicitly temporary nature of the emergency measures that

had caused harm to the claimant’s investments. A subsequent renegotiation of the

foreign investor’s licences would eliminate any offending State actions in the near

future, it argued. Such negotiations had been ongoing for five years and so “if delays

exceed a reasonable period of time the assumption that they might become permanent

features of the governing regime gains in likelihood” (Para. 107). For a case to be

considered as expropriation it has to be non-ephemeral, which it was in that case in

spite of the host government’s claims to the contrary.

4.4.6 CME v Czech Republic

72 CMS Gas Transmission Co. v Argentina (2005), ICSID Case No. ARB/01/8, Award f 12 May, 2005.

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Another award that should be mentioned in this context is the CME v Czech Republic

(2003)73. The claimant argued that the Czech Republic had deprived a local media

company, in which the Dutch claimant corporation owned a share of the ability to

broadcast according to the initial conditions of its licence. The tribunal implied that

this exclusion of the broadcast company from its sphere of activity constituted a

complete destruction of its value. However, the final damages award revealed that the

company’s loss of value was in fact only about 87%. The Tribunal followed the

precedent of Metalclad to establish indirect expropriation of the claimant’s

investment.

4.4.7 TECMED

Another case which touched on expropriation is the TECMED case (Tecnicas

Medioambientales Tecmed SA v The United Mexican States (2003))74. In this case, the

action by the host government had “negative effects on the Claimant’s investment and

its rights to obtain the benefits arising therefrom”. In particular, “economic and

commercial operations in the Landfill after such denial (of a licence) have been fully

and irrevocably destroyed, just as the benefits and profits expected or projected by the

Claimant as a result of the operation of the Landfill”. This shifted the burden of proof

to Mexico to show that the expropriation was justified as falling within the State’s

police power. The task of the Tribunal was to determine:

“Whether such actions or measures are proportional to the public interest

presumably protected thereby and the protection legally granted to

investments, taking into account the significance of such impact plays a key

role in deciding the proportionality”.

The Tribunal took the view that “a serious urgent situation, crisis, need or social

emergency” could be “weighed against the deprivation or neutralization of the

73 CME Czech Republic B.V. v Czech Republic (2003)(available at www.investmentclaims.com). 74 Tecnicas Medioambientales Tecmed S.A. v. Mexico, Award of May, 2003, 43 ILM 133(2004).

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economic or commercial value of the Claimant’s investment” to lead to the

conclusion that an otherwise expropriatory regulation does “not amount to an

expropriation under the Agreement and international law”75). The Tribunal decided

that ultimately neither the environmental concerns nor the threat of civil disturbance

due to public protests could provide a satisfactory justification for the host

government’s effective taking of the claimant’s investment.

4.5 Fair and equitable treatment

Many tribunals have ruled that this standard is intended to grant foreign investors

broad protections including stable and predictable investment enforcement in order to

maximise the volume of foreign direct investments. This trend of thinking was

summarised in the MTD v Chile case, which states that:

“Fair and equitable treatment should be understood to be treatment in an

even-handed and just manner, conducive to fostering the promotion of foreign

investment. [The BIT’s] terms are framed as a pro-active statement – “to

promote”, “to create”, “to stimulate” – rather than prescriptions for a

passive behaviour of the State or avoidance of prejudicial conduct to the

investors”76.

On the above view, a State may violate its obligation to grant investments fair and

equitable treatment if it substantially alters the legal or regulatory framework under

which those investments were made. In the case of CME v Czech Republic (involving

the claimant’s investment in a joint venture to operate a local television station) the

tribunal found that the Republic’s legislative and regulatory changes had unlawfully

harmed CME’s investment by ignoring the rules governing the investor’s business. It

held that the Government had “breached its obligation of fair and equitable treatment

by evisceration of the arrangements in reliance upon [which] the foreign investor was

75 Para. 139. 76 Para. 113.

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induced to invest”77. The obligation to safeguard “pre-existing decisions that were

relied upon by the investor to assume its commitments as well as to plan and launch

its commercial and business activities” (TECMED) is central to the concept of fair

and equitable treatment. The CMS case also emphasised the concept of investment

stability, when it found that the alteration of the gas transportation regulatory regime

was unfair and inequitable:

“One principal objective of the protection envisaged is that fair and equitable

treatment is desirable “to maintain a stable framework for investments and

maximum effective use of economic resources”. There can be no doubt,

therefore, that a stable legal and business environment is an essential element

of fair and equitable treatment”78.

In CMS Gas Transmission the State incurred liability irrespective of its motivation for

taking the offending measures79. This principle was reaffirmed in Occidental v

Ecuador:

“The stability of the legal and business framework is …an essential element of

fair and equitable treatment … Moreover, this is an objective requirement that

does not depend on whether the Respondent has proceeded in good faith or

not”80.

Support for the above approach is also found in the recent UNCTAD publication,

‘Investor-State Disputes arising from Investment Treaties: A Review’ (2006) where it

is stated that fair and equitable provisions may be construed as applicable not only to

flagrant abuses of government power but to any open and deliberate use of

government power that fails to meet the requirements of “good governance, such as

transparency, protection of the investor’s legitimate expectations, freedom from

coercion and restraint, due process and procedural propriety and good faith”. It is

77 Para.611. 78 Para. 274. 79 Para. 280. 80 Paras. 183, 186.

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also relevant to consider whether the treatment is in breach of representations made

by the host state that the investor reasonably relied upon. With respect to the latter

point the case of Waste Management Inc v United Mexican States (2004) is relevant.

One issue that may be relevant concerns possible discriminatory treatment. Only a

very few tribunals have directly applied ‘arbitrary and discriminatory measures’

clauses to particular facts. This was addressed as was its relation to national and MFN

treatment to prohibit discrimination on bases other than nationality in CMS Gas

Transmission. The claimant argued that the suppression and freeze of gas

transmission tariffs by the Argentine Government through ‘pesification’ was de facto

discriminatory and violated the relevant BIT. It was demonstrated that the measure

affected only gas transmission companies and not other public services. Exporters

(dominated by local interests) reaped very large benefits from the measure. The

Tribunal concluded that the measures were indeed unfair and inequitable but could

not be deemed discriminatory since businesses in other sectors could not be proven to

be in ‘similar circumstances’ to the gas transmission companies81.

4.6 The Governing Law

A review of both old and new available arbitral awards relevant to stabilisation yields

the conclusion that even if stabilisation is provided for in the petroleum agreement or

upstream petroleum regime, tribunals will require that international law be at least one

element of the governing law (in the legislative/contract regime) in order to award a

decision that the stabilisation is enforceable in the face of subsequent unilateral

revision of the regime by the sovereign. The exceptions would include the relatively

rare cases where, even though international law is not at least one element of the

governing law, the tribunal decides to ‘internationalise’ the foreign investment

contract, and to apply international law even though it is not provided for in the

legislative/contractual regime.

81 Paras. 293-295.

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In this context, application of a Bilateral Investment Treaty (BIT), and particularly the

application of the standard of ‘fair and equitable treatment’, might lend this key

element of international law to the formula required for stabilisation. That formula

appears to require, for arbitration purposes, a stabilisation provision in the petroleum

agreement (or elsewhere in the regime) in the first place, and international law as the

governing law in the second. In fact, there are several recent cases that are relevant to

this issue of whether a BIT can provide support to the element of stabilisation in a

petroleum agreement (but not if there is no stabilisation clause in the agreement

already).

In the ICSID case between CMS Gas Transmission Company and the Argentine

Republic (2004), it is stated that:

“It has also been established that the guarantees given in this connection under

the legal framework and its various components were crucial for the investment

decision”82, and

“In fact, the Treaty (i.e. BIT) standard of fair and equitable treatment and its

connection with the required stability and predictability of the business

environment, founded on solemn legal and contractual commitments, is not

different from the international law minimum standard and its evolution under

customary international law”83.

The CMS Case also refers to a quote from the CME Case (cited by the Claimant):

“The Government breached its obligation of fair and equitable treatment by

evisceration of the arrangement in reliance upon [which] the foreign investor was

induced to invest”84, and

The following quote from TECMED is cited to the effect that fair and equitable

treatment

82 Section 275, p.80. 83 Section 284, p.82. 84 Section 267, p. 78.

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“requires the Contracting Parties to provide to international investments

treatment that does not affect the basic expectations that were taken into account

by the foreign investor to make the investment”85

One possible reading of these available awards is that under international law, if a

foreign investor risks its capital in reliance upon a stabilisation obligation described in

an applicable host country petroleum regime, then a unilateral revision by the host

country of that regime, to the detriment of the foreign investor, would constitute a

breach of the stabilisation obligation for which damages, and possibly specific

performance, depending upon the circumstances, would be available to the foreign

investor. If, however, there is no stabilisation provision in the petroleum regime (not

applicable in this case), then the foreign investor could not reasonably claim that it

had made its investment in justifiable reliance upon stabilisation.

4.7 Summary

• The classical arbitration awards largely relate to a form of stabilisation and a kind

of ‘event’ that are at best marginal today. A whole-scale attempt to freeze the

provisions of a contract over long periods of time is unusual, as are explicit

attempts at full-scale expropriation.

• The more recent awards concerning indirect expropriation are potentially relevant

in connection with the imposition of fiscal obligations that alter the economic

balance struck between the parties at the time that the contract became effective.

There appear to be no published awards dealing with stabilisation provisions of

the modern variety, which are sometimes no more than ‘agreements to agree’.

However, the awards made in cases of alleged indirect expropriation offer only

small comfort to investors. Each case has to be analysed in the light of its 85 At Section 268, p.78; also cited in MTD v Chile, at Section 114, p. 105, noting that TECMED was in turn referring to the ELSI Case.

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particular facts, but the general conclusion is that expropriation claims are

unlikely to be accepted as a basis for compensation.

• Another conclusion is that a finding in favour of the investor on the basis of

unfair and inequitable treatment may have greater chances of success than one

based on indirect expropriation. However, the law is in a state of flux in this area

so much will depend on the context of the particular case brought before the

tribunal.

• There are obvious limitations on the relevance of the more recent awards since

they involve the consideration of the implications of stabilisation clauses by

analogy. Some of the modern stabilisation clauses are more than agreements to

agree and contain elements that stipulate outcomes if the parties fail to agree and

rights for IOCs to refer the matter to arbitration if negotiations fail. These offer

improved prospects of a remedy in the form of compensation at least.

• The role of due diligence in facilitating the enforcement of a stabilisation clause

has been emphasised. Some government measures that impose fiscal obligations

may be rooted in changes to practice rather than overt legislative adoption of new

measures. Evidence of having carried out due diligence will be important in

taking a case to arbitration.

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Part 3: Contract Stability in non-Fiscal Areas

Chapter 5: Environmental, Safety and Health Exceptions

5.1 Managing Uncertainty

In Part 3 we noted the existence of ‘carve-outs’ and exceptions for areas that some

host governments deemed to be inappropriate to subject to the kind of constraint that

they were prepared to accept for the regime applicable to fiscal stability. The areas

typically reserved by States are those concerning rules on environmental

management, safety, health, and sometimes defence and local community interests.

In addition to these familiar areas, on the horizon we can see that changing

perceptions of ‘human rights’ are likely to impact upon international investment, and

perhaps impose new kinds of obligations on investors.

This is an area in which IOCs have important concerns with respect to ‘reputation

risk’. Yet, taking action to tackle the challenges is far from straightforward. Although

many host governments are reluctant to include these subjects in their stabilisation

commitments, the risk to investors is less from a deliberate act from a host

government than from changing public perceptions about what governments or their

agencies should be doing, the impact of new treaty obligations, better quality

information about, for example, environmental impacts and the open-ended and

voluntary character of many of the terms and concepts used.

One response would be to address this new category of risk in the manner that one

authority identifies: “the strategy of investors has been to negate environmental laws

through stabilisation clauses in the contract which seek to freeze such controls at the

time of entry and exclude the application of later improvements to environmental

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standards to the investment”86. As we have argued here, many governments have been

understandably reluctant to concede such a wide application of the ‘freezing’ concept,

and its poor chances of enforceability make it unlikely to attract many reputable

investors. Another response would be to engage with these trends, and this chapter is

designed to assist investors with such an open frame of mind.

5.2 Vulnerability in Non-Fiscal Areas

The increasingly difficult and sometimes controversial area of environmental

management in oil and gas projects needs to be set in what is gradually becoming a

well established institutional framework, frequently established in a petroleum code

or basic law. This should enable the issue of contract stability vis-à-vis environmental

management to be seen in the way in which it generally arises in practice. It is now

common form to require an independent environmental impact assessment before

proposals for development of a petroleum field are submitted to government or to its

agencies for approval. An environmental management plan which takes account of

the conclusions of the impact assessment will normally form a key part of the

investor’s proposals, and if, and when, approved will constitute a contractual

commitment which the investor is expected to honour. The investor will, however,

expect, or at least hope, that what has been agreed with the host government in the

relevant environmental provisions of the petroleum contract (and the country’s

environmental law regime) will mark the limit of his obligations. However, the

reluctance of most governments to close off their environmental jurisdiction by

agreeing to limit an investor’s obligations to what has been set out at the time of

signing the contract has sometimes been the source of problems currently arising in

negotiations (not least at the development plan stage). This can lead to a difficult

search for acceptable words which will define the circumstances in which the

government can impose new obligations on the investor that go beyond what is in the

development plan, or are set out in applicable legislation in force when the petroleum

contract was agreed.

86 M Sornarajah, The International Law on Foreign Investment (2nd ed), 180.

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An illustration of the complicated wording that may result from the attempts to

balance the Contractor’s concerns for stability with the government’s reluctance to tie

its hands with respect to environmental management may be gained from the second

version of a model contract that the Government of Trinidad and Tobago has issued.

In the Article on conduct of petroleum operations, it states that the

“Contractor shall conduct Petroleum Operations hereunder in a continuous,

diligent and workmanlike manner, in accordance with applicable law and the

Contract, and sound and current international Petroleum industry practices

and environmental standards applicable from time to time in similar

circumstances, all designed to achieve efficient and safe Exploration and

Production of Petroleum and to maximise the ultimate recovery of Petroleum

from the Contract Area. In this regards, Contractor shall ensure that all

materials, equipment, technologies and facilities used in Petroleum

Operations comply with engineering and environmental standards generally

accepted in the international Petroleum industry, and are kept in good

working order”.

The very open-ended character of `standards that may be applicable from time to

time’ is qualified by the words ìn similar circumstances’ and by the notion of

purpose attached to the operation of such standards. There appears to be no question

of their being linked to an increased economic take.

Some further remarks may be made on the notion of the ìnvestor’ used above. Some

oil and gas companies, usually the larger ones, have become pro-active in adopting

the best international practice with respect to environmental and safety standards.

This is partly an insurance against future claims against them and partly an attempt to

raise the bar so that the risk of amendment in the near future declines. Other investors

may take a more cavalier approach to the definition of environmental and social

obligations that they are expected to assume at the outset of a project. This may lead

to potential difficulties if the host government seeks to upgrade the relevant

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environmental provisions at a later date in line with changing international patterns of

petroleum conduct. There is plenty of evidence of countries updating their rules on

environmental management in recent years.

5.3 Examples of Environmental Rule Development

5.3.1 Tanzania

In a production sharing agreement of 199087, the provisions with respect to

environmental protection are very limited. The contractor has to take all necessary

and adequate steps to prevent pollution and protect the environment. A failure to

comply which results in pollution or damage to the environment or marine life means

that the contractor will have to take remedial measures, and such costs are not to be a

recoverable contract expense. This follows closely the wording of a model agreement

issued in 1989. It contrast with the kind of provision found in neighbouring Kenya in

1989, where the contractor was required to carry out petroleum operations “diligently

and in accordance with good international petroleum industry practice”88 (and the

IOC’s exposure is thereby more limited in this case).

By 1995 these requirements had expanded to include a mandatory requirement that

the contractor should undertake at his own expense (but as a legitimate recoverable

cost) at least one comprehensive environmental impact assessment prior to

commencing major operations89. Compensation for injury to persons or damage to

property caused by the effects of petroleum operations was also added. It could be

asked whether the IOC’s liability under these arrangements might not be greater than

they would be under an ‘international standard’.

87 Texaco Production Sharing Agreement dated 7 May 1990 between the Government of Tanzania, Tanzania Petroleum Development Corporation and Texaco Exploration Tanzania Inc (Ruvuma Basin). 88 Production Sharing Contract of 1989 between Total/Amoco/Marathon/Texaco and the Government of Kenya (Block 1). Pollution had also to be avoided and all waste materials disposed of in accordance with good international petroleum industry practice (Art 8). 89 Model Production Sharing Agreement between the Government, TPDC and the Contractor, 1995.

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The most extensive changes are not evident, however, until the production sharing

agreement concluded with Pan African Energy in 200190. This makes express

reference to compliance with the applicable laws of Tanzania (creating an open-ended

exposure to the IOC) and with good oilfield practices, as well as an external frame of

reference on environmental management standards, the ISO 14000 series, as

amended. The requirement to carry out an EIA is mandatory for each major operation,

perhaps implicit in previous agreements but now more clearly spelled out. There is a

requirement to notify in the event of an emergency or accident affecting the

environment and is required to take such action as may be necessary or prudent

according to good oilfield practices in such circumstances. A failure to take prompt

action to control or clean up any pollution or make good any damage caused, means

that the state company may take action in accordance with good oilfield practices and

the applicable laws of Tanzania.

5.3.2 Kazakhstan

In a production sharing agreement from 199391 the clause on environmental matters

proves to be very limited. The parties to the contract are obliged to comply with the

applicable environmental laws of Kazakhstan; to submit a plan for development of the

local environment and to accept responsibility for any petroleum lost by accident or

leakage due to the contractor’s equipment or operations.

By contrast, the model contracts issued in 1997 and 200192 by the Government

contain much more detailed provisions on environmental matters. For example, a

permit is required for the use of natural resources from the state conservation

authorities. The provision contains nine as opposed to three paragraphs in the 1993

contract, and is accompanied by provisions on safety of personnel and liabilities of

90 Production Sharing Agreement between the Government of the United Republic of Tanzania, the Tanzania Petroleum Development Corporation and Pan African Energy Tanzania Ltd, relating to the Songo Songo Gas Field, 2001. 91 Production sharing agreement dated 8 April 1993 between the Government of the Republic of Kazakhstan and the Oman Oil Company Limited (Atyrau Exploration Area). 92 Model Contract for Oil and Gas (Decree 108 of 17 January 1997) and Model Contract of 31 July 2001.

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the parties for violating the provisions of the contract. Provisions for state monitoring

for compliance are included as are clean-up obligations.

Legal development continues and the overall framework for stability of contracts is

now framed by the 2005 PSA Law. The general principle established in the PSA Law

is that contract provisions remain in effect for their entire term. Amendments may be

introduced only by agreement of the parties. If, during the PSA term, there are any

legislative changes “that worsen or improve the commercial results of the contractor’s

activity under the PSA, then amendments are to be introduced to give the contractor

the commercial results it could have received under the legislation in effect at the time

the PSA was signed. However, there is no provision for stabilisation by indemnity in

case full compensatory amendments cannot be agreed. There is also an exemption for

changes in the law that concern environmental protection or safety. Elsewhere in the

law, there are guarantees of contractor’s rights such as protection form acts of the

executive branch and local government acts that would restrict PSA rights. But, there

are express and indirect exemptions to this: expressly, for lawful acts in the areas of

environment, safety, health and social and national security; indirectly, by the

possible application of certain special Civil Code rules that could allow termination

initiated by one party; also, in the event of the PSA development period renewal

beyond the original term.

There are a number of termination risks but it is worth noting that PSAs have a civil

law character, and so they are subject to the Civil Code grounds and procedures for

contract termination as well as the provisions of the PSA law. In contrast to Russia,

provisions of international treaties to which Kazakhstan is a party prevail over any

inconsistent provisions in the domestic law.

5.4 Designing Solutions

During the past 10-15 years it appears that some mechanisms for the promotion of

environmental protection have been introduced into standard forms of petroleum

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contract with very little controversy or litigation. Examples include the now common

use of environmental impact assessments and planning mechanisms for

decommissioning of petroleum installations and structures. It is more difficult to

identify published evidence that would support the claim that these instruments have

been introduced into existing agreements without triggering any implications for

stabilisation arrangements in those agreements. However, informal discussions with

industry and government personnel seem to support the view that acceptance of

changes has been possible after consultations and compromise so that any economic

consequences for the petroleum agreement are managed in a way that is fair to the

investor and host government. The progress made in this area suggests that a

pragmatic, conflict-free approach to the adaptation of petroleum agreements in future

years is a real possibility.

In the BTC pipeline project the parties decided to make specific references to the kind

of standards that they deemed appropriate. In an Appendix to the HGAs, there is a

Code of Practice on Environmental and Social Issues (Appendix 5). On

environmental matters it includes a stabilisation provision in Clause 3.3. Wisely, it is

directed at “any regional or intergovernmental authority having jurisdiction” and

states that if it enacts or promulgates environmental standards relating to areas where

pipeline activities occur, the project parties and the Government of the respective host

country are to confer on the possible impact of this measure. It adds: “in no event

shall the project be subject to any such standards to the extent that they are different

from or more stringent than the standards and practices generally operating in the

international petroleum pipeline industry for comparable projects”. In the same Code,

there is an almost identical provision in Clause 4.2 that has the same stabilising

intention with respect to “social regulations or guidelines”.

One issue that arises from the greater weight given to this subject is the priority given

to environment in relation to safety and health and other similar objectives. The State

of Qatar provides an illustration as to how this might be addressed in a contract

concluded in 2001. The contractor is required to act at all times according to the

ìnternationally accepted petroleum industry practices prevailing at the time’. It is to

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do so to minimise any adverse impact to the general environment. The agreement then

adds: “The order of priority for actions shall be (i) the protection of life; (ii)

environment, and (iii) property”93.

5.5 Benchmarking

There is a procedural difference between amendment of a fiscal element or elements

in a petroleum agreement and amendments that affect the ‘exceptional’ issues at issue

here. There is of course the possible situation in which a host government will seek to

amend the agreement’s environmental provisions with a view to extracting additional

revenue from the contractor. If there is evidence that this is the principal objective of

the host government, then it could be addressed by the contractor as a breach of the

agreement and the normal remedies would apply. However, where a host government

is proposing in good faith to update or expand the environmental obligations of a

contractor, it will have to make reference to developments in the `global market’ for

environmental regulation: that is, to specific changes in international standards,

regional conventions, or industry standards, that require the injection of new content

into its national legal framework. An example, from the field of decommissioning of

petroleum installations and structures would be the IMO Guidelines and Standards or

the OSPAR Convention Decision 98/3. This need for ìnternational referencing’ is

made more complex (than say referring to an internationally set oil price) by the fact

that there is no single source of environmental standards relevant to petroleum

operations. In most cases, the host government has a freedom to choose which

standards to adopt and whether to treat them as a minimum or not.

This procedural difference is complicated by the fact that it may not be the

government that is the principal mover for such international referencing. The

investor may take the initiative because it has an interest in creating as much stability

as possible in the performance of the contract. Given the highly uncertain character of

93 Development & Production Sharing dated 23 December 2001 for Dolphin Contract Location, North Field between Qatar & Offset Investments Company Limited & TotalFinaElf E&P Dolphin, Arts 9.1 and 11.1.

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international environmental rules, guidelines and standards, and above all, their

unsettled or developmental aspect, an attempt by the investor to secure agreement on

standards that might prevail for many years would be understandable. It has been a

feature in negotiations with several of the larger western companies in recent years.

An agreement on an international frame of reference has the advantage that it is more

likely to survive a change of government in the host country.

In this attempt at securing an international footing for environmental standards, the

investor may have the support of the state petroleum company, which may be the

principal interlocutor in this respect, and may also be an international investor. This

may facilitate discussion of another important element in the discussions: how to meet

any additional cost of a transition to a new set of environmental standards. That said,

the possibility that a change in standards may lead to increased costs is one that will

inevitably encourage the investor to try to limit the host government’s freedom to

make future changes in this respect.

On this matter of potential costs, some sense of perspective is advised however, since

the costs are unlikely to reach levels that they might in the hard rock mining industry,

although with respect to oil pipelines they might be significant. This suggests that this

is an area that is likely to be manageable if approached in a spirit of good faith by the

parties and if it involves consultation and negotiations with a view to reaching a fair

and reasonable outcome.

To make progress on this issue, the effectiveness of the means will be influenced by

the stage at which they are introduced. If the discussions take place before a contract

is signed, it will be a less sensitive topic than if an agreement has already been

concluded and is in operation. However, the kind of wording that is evident from the

sample of contract provisions given in section 3, shows that this provides little

security for the investor. There may in practice be little difference between the stages

at which the issue of new environmental standards is raised.

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In terms of means, it seems important to try to eliminate any impression of

arbitrariness and to provide the investor with as much certainty as possible at an early

stage. One way of proceeding would be to try to establish some benchmarks with

which to assess the adequacy of the standards referred to in the agreement. These

might include: international conventions and other international law instruments;

improved scientific knowledge as evidenced in various published reports, and the

various industry standards. These could be prioritised. Above all, they would act as

reference points for the host government and the contractor/investor. There would

also have to be a notification mechanism, in which the government would signal to

the investor that it considers a modification of the existing environmental standards to

be necessary within an agreed time frame. This would allow the investor to factor in a

potential change to its business calculations well in advance of any action being

required. It would avoid any unilateral action, with the inevitable risk of litigation or

other legal proceedings arising from the contract. There would also be little risk of

such a procedure being used by a host government as an excuse for removing the

contractor from the project.

5.6 Standards and Liability

There are many different forms of soft law international standards, guidelines, codes

and recommendations that apply in the petroleum industry. Oil and gas companies

have a plethora of operational guidance available to them from the API, the IP, EU,

SPE, and so on. These are technical or professional or industry-wide standards rather

than the incipient form of some global regulation. Moreover, these have only limited

effect in any given instance, in which the soft law will be interpreted and applied in a

specific way; in other words, the body of norms which is to be complied with is to be

selected on a case by case basis. These are carried indirectly into a particular

jurisdiction by filling out open-ended legal or contractual requirements to conduct

petroleum operations at all times according to `good international petroleum industry

practice’, or wording to similar effect. They do not have the full force of international

law nor do all of the various standards enjoy a universal acceptance, not even in the

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international petroleum industry itself. These standards are also in a state of evolution

and are periodically updated. Determining the standards that are relevant in a

particular case may require an expert opinion.

In spite of the foregoing, many petroleum contracts continue to rely heavily on

wording such as “internationally accepted petroleum industry standards”. There are

many industry bodies that could be said to have authority for issuing standards, but

none are likely to accept any liability for reliance upon Codes or guidelines that they

issue on these matters. The Australian Petroleum Industry Association (APPEA) for

example, specifically states in its Environmental Code of Practice that it accepts no

liability for any reliance upon this Code to satisfy legal obligations. The Code would

probably represent what is “generally accepted as good and safe” for a company

seeking to rely on it as a defence against prosecution for a breach of obligations

arising from the agreement’s provisions on conduct of petroleum operations.

However, there would be no guarantee of this. The Code may also be open to

criticism as out-of-date or insufficiently comprehensive.

A development of importance is the evidence that some host governments and

investors are attempting to identify specific external sources of reference for

benchmarking of evolving standards. This has figured most prominently in the legal

arrangements made for the BTC pipeline. Clearly this approach has advantages for an

investor in managing the risk that standards may be applied in future that are

unreasonable and/or unfair. There is scope for discussion about how this linkage can

be achieved in a particular case but reference to other countries that have similar

circumstances and keep their standards abreast of technological improvements and

environmental needs is surely a useful way of concretising this general wording.

There are also rules and principles to be found in voluntary codes and guidelines

adopted by the international petroleum industry, usually through the main industry

associations94. Most petroleum contracts make reference to standards of conduct such

94 OGP (formerly the E & P Forum): “Principles for Impact Assessment: The Environmental and Social Dimension” (Report No. 2.74/265); “Decommissioning, Remediation, and Reclamation Guidelines for Onshore Exploration and Production Sites (Report No. 2.70/242); “Exploration and Production Waste Management Guidelines” (Report No.2.58/196), and “Oil Industry Operating

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as Good Oilfield Practice or Best Pipeline Practice. This is not a new development in

the international petroleum industry: for many years such standards have been taken

by courts in the US to refer to clearly defined standards provided by respected

industry bodies such as the American Petroleum Institute or the Energy Institute in the

UK. This has helped to make such wording justiciable.

The bodies that are most active in this area are the petroleum industry associations,

the OGP, the Energy Institute (UK) and the API. They have produced guidelines and

codes of conduct that represent sources for the identification of ìnternationally

acceptable operating practices’, covering a wide variety of operations in different

contexts95. Given their very wide membership comprising reputable companies, the

outcome of their collective deliberations must be seen as exhibiting a high degree of

professional consensus. The guidelines they produce do indeed have legal

significance but not as legally binding rules. Their relevance is as points of reference

– benchmarks even - that no judicial or mediating body could afford to ignore. They

therefore have more than a highly persuasive character. On the other hand, there is no

single set of guidelines or global Code of Practice that may be referred to, but rather a

multiplicity of not always harmonious sets of norms and standards. This is relevant

since an oil company may be a member of more than one association that has

produced a set of guidelines, standards and Best Practices.

Of increasing importance are the standards adopted and promoted by the international

financial institutions, and especially the World Bank Environmental and Safety

Standards and Guidelines96. Since these institutions have provided finance and

Guideline for Tropical Rainforests” (Report No. 2.49/170). Also: International Association of Geophysical Contractors: “Environmental Guidelines for Worldwide Geophysical Operations, 1994 and the International Petroleum Industry Environmental Conservation Association, which has a series of Best Practice papers available at www.ipieca.org, and the websites of the American Petroleum Institute (www.api.org) and the UK Offshore Operators Association (www.oilandgas.org.uk). 95 See for example the discussion in `Key Questions in Managing Social Issues in Oil and Gas Projects’, available on OGP website, and the references in Note 5 of this Report. 96 The World Bank Group has produced various documents including OP 4.01 on Environmental Assessment, the Environmental Assessment Sourcebook and OP 4.20 on operating procedures concerning indigenous peoples. The International Finance Corporation (IFC) has published a Manual on Consultation available at www.ifc.org/enviro/. This follows closely the approach of the World Bank.

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guarantees for a number of cross-border pipeline projects in developing countries,

their insistence upon conduct in accordance with these standards is potentially of

great importance97. The OECD (an international organisation but not a financial

institution) adopted Guidelines for Multinational Enterprises in 2000 which allow

members of the public to allege breaches of the Guidelines’ recommendations before

designated follow-up institutions. Chapter V of the Guidelines is directly aimed at the

performance of enterprises in environmental areas. However, several of the

recommendations go beyond this focus upon typical issues such as environmental

management systems and risk prevention and mitigation. Enterprises are encouraged

to engage in stakeholder communication and consultation and to contribute to this

process by means of partnerships and initiatives that will enhance environmental

awareness and protection98.

It may be noted that there are at least three types of standards or guidelines that assist

in protecting the environment. These are: standards for equipment and products

(construction requirements for pipelines, for example); standards that address

environmental practices, such as emissions limits, and a third type of standard that

assists companies to improve environmental performance by adopting environmental

management procedures and systems. In the latter group may be found best practices

for environmental protection such as EIAs and SIAs, environmental management

systems, environmental performance evaluation, environmental monitoring and

auditing and environmental reporting99.

5.7 Access to Justice

97 In this context, mention should be made of the New Equator Principles based on World Bank and IFC standards, which promote a variety of goals in project lending such as the making of environmental and social assessments as standard practice. 98 See some corporate responses in the various documents produced by the International Association for Impact Assessment: www.iaia.org 99 A very comprehensive treatment of this is to be found in A S Warwyk, Àdoption of International Environmental Standards by Transnational Oil Companies: Reducing the Impact of Oil Operations in Emerging Economies’, 20 Journal of Energy and Natural Resources Law (2002) 402-434.

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With respect to the issue of access to justice, which might be considered a ‘human

right’, the legal parameters of this are set by the provisions of the Aarhus

Convention100. Members of the public may under Article 9(3) seek judicial review of

acts which contravene environmental law. They may do so irrespective of whether the

acts complained of transgress public participation rights endorsed in the treaty. In

particular, the Convention provides that each State that is a party to the Convention:

“shall ensure that, where they meet the criteria, if any, laid down in its

national law, members of the public have access to administrative or judicial

procedures to challenge acts and omissions by private persons and public

authorities which contravene provisions of its national law relating to the

environment”.

However, the words which limit such acts to those that `meet the criteria, if any, laid

down in its national law’ are significant. They provide a great deal of discretion to

States Parties as to implementation by allowing the public access only in certain

circumstances.

The provisions of Article 9(2) are narrower and address the issue of standing in

relation to the review of the public participation provisions in Article 6 of the

Convention, as well as other relevant provisions of the Treaty. This provision also

suffers from some weaknesses. The State has to ensure that within the framework of

national legislation the members of the public have sufficient interest or have access

to a review procedure before a court of law and/or another independent or impartial

body established by law to challenge the substantive and procedural legality of any

decision. However, “what constitutes a sufficient interest and impairment of a right

shall be determined in accordance with the requirements of national law and

consistently with the objective of giving the public concerned wide access to justice

within the scope of the Convention”. The interest of an NGO falls within this

100 Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters, done at Aarhus, Denmark, on 25 June 1998. Annex I contains a List of Activities which includes pipelines for the transport of gas, oil or chemicals and installations for the storage of petroleum, petrochemical or chemical products.

89


provision. However, the requirements to guarantee access to justice appear to leave

the signatories a considerable degree of control over the procedural conditions under

which such access is provided. The rights of access to justice guaranteed by Article

9(2) are in any case less explicit in relation to the participatory rights granted under

Article 6 than the rights granted under the other pillars of the Convention (access to

information, public participation in decision-making). Moreover, they do not extend

to the enforcement of participatory rights guaranteed in relation to the preparation of

plans and programmes.

It is striking that so far there appears to be little that is relevant to this issue in the

provisions of any petroleum contracts reviewed in the course of this study. This may

be explained by the early stage which the international law on this subject is. It may

also be that in this area the issues are not considered to be pressing in most countries.

However, if so, this situation is unlikely to remain for long.

The hard international law is to be found in international environmental treaties, such

as the Aarhus101 and Espoo102 Conventions but also in regional agreements such as the

EC Environmental Impact Assessment Directive 85/337/EEC, as amended by

Directive 97/11/EC and Directive 2003/35/EC. Other international conventions may

also be relevant, as well as soft instruments such as Declarations103. Currently, there

are 40 signatories and 30 parties to the Aarhus Convention including Azerbaijan,

Georgia, the European Community and the UK. Initially, the practical implications of

such treaties are often unclear. Ratification is the beginning of a process;

implementation, especially in the poorer developing countries, is likely to be uneven.

101 Aarhus Convention, points 14 and 18 respectively. 102 Convention on Environmental Impact Assessment in a Transboundary Context, done at Espoo, Finland, on 25 February 1991. 103 A list of the relevant conventions and declarations would include the following: the Stockholm Declaration 1972; the UN Convention on the Law of the Sea 1982; the Vienna Convention for the Protection of the Ozone Layer 1985; the Montreal Protocol on substances that delete the Ozone Layer 1987; the Convention on the Control of Trans-Boundary Movements of Hazardous Wastes and their Disposal (Basel Convention 1989); Rio Declaration on the Environment and Development 1992; UN Framework Convention on Climate Change 1992; the Convention on Biological Diversity 1992; the UNFCC Kyoto Protocol 1997. Note also ILO Convention No 169, which stipulates inter alia that indigenous people shall be consulted, their environment shall be protected and their rights to natural resources pertaining to their lands shall be safeguarded when undertaking any extractive industry related project (Arts 6, 7.4 and 15 respectively).

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That said, the principles articulated in the Aarhus Convention on access to

information, public participation and access to justice have been widely adopted in

international forums and are acting as benchmarks against which many organisations

assess their performance in these areas104. Its relevance to the design and negotiation

of petroleum contracts justifies some brief consideration of its main provisions.

The Aarhus Convention requires States Parties to guarantee the rights of access to

information, public participation in decision-making, and access to justice in

environmental matters (Art 1). It links environmental rights with human rights and

establishes that sustainable development can only be achieved through the

involvement of all of the stakeholders. The main thrust of the Convention is directed

at public authorities at all levels and bodies performing public administrative

functions (although it does this via the States Parties to the Convention, not directly to

the citizens and other stakeholders). Procedural requirements are included for public

participation in decisions for specific activities. In the Annex listing the activities,

item 14 refers to large-scale pipelines for the transport of gas and oil and item 18

refers to large installations for the storage of oil and gas. For enforcement of

environmental law actions may be initiated by members of the public, whose standing

is to be determined at the national level. In the context of this review, Article 9 on

access to justice is of particular importance. Each party shall ensure that any person

who considers that his or her request for information has been ignored or wrongfully

refused or inadequately answered has access to a review procedure before a court of

law or another independent and impartial body established by law. Each party has to

ensure that members of the public concerned have access to a review procedure

before a court of law to challenge the substantive and procedural legality of any

decision, act or omission. To further the effectiveness of Article 9, each party shall

consider the establishment of assistance mechanisms to remove or reduce financial

and other barriers to access to justice. The parties are expected to take action within

the framework of their national legislation.

104 See the survey in the UN ECE document on this: 12 September 2002, UN website GE.02-32477.

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The seven standards set out in the Aarhus Convention for access to justice are as

follows:

1. Access to justice to be available for any person within the limits of the

Convention means access to judicial or other independent and impartial

review in an expeditious and affordable manner;

2. Review of the handling of information requests;

3. Review of the handling of public participation;

4. Review of acts and omissions of persons or public authorities concerning

national law relating to the environment;

5. Minimum standards, including adequate and effective remedies, fairness,

equity, timeliness and reasonable cost;

6. Decisions in writing and publicly accessible, and

7. Appropriate assistance mechanisms to remove or reduce financial and other

barriers to access to justice.

Another relevant instrument of international law is the Espoo Convention on

Environmental Impact Assessment in a Transboundary Context. Addressed to States,

it obliges the parties to assess the environmental impact of certain activities and to

notify and consult neighbouring states on all major projects under consideration that

may have a significant adverse environmental impact across boundaries. In its

Appendix, item 8 expressly refers to large diameter pipelines for the transport of oil

and gas among the activities listed as falling within the scope of the Convention.

Article 2.2 requires Parties to establish a national EIA procedure that permits public

participation, but the Convention does not specify the detail of such procedure,

regarding it as a matter for the national authorities to determine. Where signatories are

also parties to the Aarhus Convention and the EU, the detail will have to comply with

those provisions, including in the EU case, the EIA Directive 85/337/EEC, as

amended.

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5.8 Summary It does not appear that, in a general sense, stabilisation mechanisms have been an

obstacle to the process of developing more exact and enforceable environmental

standards and access to justice. So far, their raison d’etre has been in very large part

limited to concerns for economic and fiscal issues (and understandably so). The

impact of stabilisation mechanisms in this area has yet to be felt.

Some investors and host governments are attempting to identify specific external

sources of reference for benchmarking of evolving standards. This has figured

prominently in the legal arrangements made for the BTC pipeline. Clearly this

approach has advantages for an investor in managing the risk that standards may be

applied in future that are unreasonable and/or unfair. There is scope for discussion

about how this linkage can be achieved in a particular case but reference to other

countries that have similar circumstances and keep their standards abreast of

technological improvements and environmental needs is surely a useful way of

concretising this general wording.

In the example of the BTC agreement, both general industry standards and

international law are applicable but the curious feature of this agreement is the extent

to which the host government has given up its claim to be the principal source of

authority on environmental matters falling within its own territory. The approach

adopted by the investors has been to persuade the host government to accept a

standard of good international petroleum industry practice. This is not unusual but it

was supplemented in this case by reference to the environmental standards applied to

similar pipelines in two EU Member States, with similar, challenging geographical

features (mountains, coastline). The justification for this is that the two countries

could be expected over time to keep their standards abreast of technological

improvements and environmental needs; that the standards applicable to these

pipelines were in this way more readily identifiable and that the reference countries

had a track record of effective, realistic environmental regulation which balances

environmental goals with a recognition that solutions need to be cost effective.

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94


Part 4: Conclusions and Recommendations

Chapter 6: Tools for Oil and Gas Investors

6.1 Conclusions • The form of stabilisation commitments sought by investors has shifted from an

emphasis upon ‘freezing’ the terms and conditions of contracts to one in which

stabilisation can take a number of forms, often with an emphasis on balancing

achieved through negotiation;

• A significant number of countries, especially (but not only) those with proven

petroleum reserves, do not feel the need to offer stabilisation provisions to attract

investors;

• Many stabilisation provisions are likely to be subject to two limitations: the

constraints imposed by the wider legal and constitutional framework on the

guarantees provided in the petroleum contract, and any exceptions required for

non-fiscal matters.

• The risks of unilateral action by host governments remain as significant for

investors today as ever before and are evident among a wide range of

governments. For that reason the provision of a stabilisation clause holds out the

prospect of additional security. However, an over-eager willingness on the part of

host governments to offer such security may spring more from a policy of

investment promotion rather than a full appreciation of the commitment that is

being made. In this respect, investors would be wise to take extra care with the

design of mechanisms for possible use in enforcement at a later date.

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• Host governments have a wide range of instruments at their disposal for the

introduction of unilateral measures. It should also be noted that other powers

deriving from the petroleum law regime will usually offer the government

opportunities to persuade the investor of its case or to strike a compromise

arrangement.

• The risks to the host government itself of taking unilateral action (such as the

damage to its reputation as an investment location) offer potential solutions.

Negotiation about the differences generating a proposed unilateral action should

be enhanced by an awareness of these possible consequences.

• This volatile context facing investors suggests that those forms of stabilisation

that attempt to ‘freeze’ the provisions of a petroleum contract over long periods

of time are likely to prove much less effective than provisions that focus on the

results of a possible unilateral revision in the petroleum contract and which adapt

the wording of the stabilisation mechanism accordingly.

• A number of countries still provide for stability in the form of ‘freezing’

obligations in the contract. However, given the high risk of unilateral action at

some future date this is in itself a highly unreliable mechanism. Perhaps in

recognition of this, the long-term trend has unmistakeably been one in which

economic balancing has been favoured, often involving negotiations between the

parties about the result.

• An open-ended approach to negotiated economic balancing however is also a

high risk strategy. It should be complemented by details and penalties for non-

compliance: imposition of time limits on negotiations, recognition that

compensation must follow a loss or damage and recourse to arbitration if the

negotiations fail.

• In a number of cases the NOC will play a central role in fiscal stabilisation. It

may provide for adjustment by paying any additional taxes out of its share of

96


profit petroleum or royalty under a PSA or it may reimburse the IOC directly out

of general revenues. Under a rate of return system, the NOC could pay from its

share of royalty and/or excess profits tax. However, the NOC share of production

may prove insufficient or it may be pre-sold.

• The object of an economic balancing provision is not to address an act of

expropriation by the host government but other approaches to stabilisation do

take this into account. A more difficult area is the impact of an act of ‘creeping

expropriation’.

• States can revise contracts unilaterally. The real issue in designing the

appropriate stabilisation mechanisms is not so much whether the host government

can unilaterally change the contractual relationship but rather what is the result of

such legislative action for the investor in terms of lump sum damages or possible

specific performance of stabilisation mechanisms.

• The growing interest in cross-border pipeline projects is generating new

approaches to stabilisation involving a more complex set of legal arrangements. It

is too early to say whether such arrangements are as effective as they are

innovative in their approaches to fiscal stability.

• The classical arbitration awards largely relate to a form of stabilisation and a kind

of ‘event’ that are at best marginal today. A whole-scale attempt to freeze the

provisions of a contract over long periods of time is unusual, as are explicit

attempts at full-scale expropriation.

• The more recent awards concerning indirect expropriation are potentially relevant

in connection with the imposition of fiscal obligations that alter the economic

balance struck between the parties at the time that the contract became effective.

There appear to be no published awards dealing with stabilisation provisions of

the modern variety, which are sometimes no more than ‘agreements to agree’.

However, the awards made in cases of alleged indirect expropriation offer only

97


small comfort to investors. Each case has to be analysed in the light of its

particular facts, but the general conclusion is that expropriation claims are

unlikely to be accepted as a basis for compensation.

• Another conclusion is that a finding in favour of the investor on the basis of

unfair and inequitable treatment may have greater chances of success than one

based on indirect expropriation. However, the law is in a state of flux in this area

so much will depend on the context of the particular case brought before the

tribunal.

• There are obvious limitations on the relevance of the more recent awards since

they involve the consideration of the implications of stabilisation clauses by

analogy. Some of the modern stabilisation clauses are more than agreements to

agree and contain elements that stipulate outcomes if the parties fail to agree and

rights for IOCs to refer the matter to arbitration if negotiations fail. These offer

improved prospects of a remedy in the form of compensation at least.

• The role of due diligence in facilitating the enforcement of a stabilisation clause

has been emphasised. Some government measures that impose fiscal obligations

may be rooted in changes to practice rather than overt legislative adoption of new

measures. Evidence of having carried out due diligence will be important in

taking a case to arbitration.

• A new generation of risks is arising for investors in the petroleum sector as a

result of changing attitudes to environmental issues. To a limited extent this is

reflected in the body of international law that is now emerging to address such

concerns and in the provisions of petroleum contracts over the past 10-15 years.

However, in order to provide investors with the continued stability they seek a

review of the traditional definitions of standards such as Good Oilfield Practice is

required. In particular, efforts should be made at developing an industry-wide

code that host governments could refer to in future agreements and which could

be enforced.

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• A benchmarking approach to the design of industry standards seems likely to

capture the balance between flexibility and certainty that companies and host

governments will need to recognise in designing provisions. However, this would

have to be accompanied by clear provisions on how the cost of any such

amendments is to be met and by whom.

6.2 Tools for Oil & Gas Investors

• As a tool for stabilisation the classical approach of freezing is not recommended

given the difficulties in enforcing it in arbitration in current circumstances. It is

much more in line with the trend of arbitral awards to design a stabilisation

clause that provides for specific actions to be triggered as a result of a

unilateral alteration in the economic equilibrium. In this sense, the approach

of ‘negotiated economic balancing’, which amounts essentially to an agreement

to agree, appears an unsatisfactory choice, precisely because of its lack of

provision for specific actions. However, a stipulated result in the event that the

parties do not agree and an express right granted to the investor to take the issue

to arbitration would be important elements to include.

• The economic balancing provision is one that has several forms but all of them

have a weakness with respect to the NOC or host government share of profit

petroleum which may be used up at a time to recourse. The more secure approach

is to require the NOC to pay for any increased fiscal obligation or obligations and

to have the host government act as guarantor for this.

• Care should be taken to examine the potential role of BITs in providing

additional support for a stabilisation clause in a particular context. Where

international law is not provided as the governing law in the event of a dispute,

the application of a BIT (and possibly a multilateral investment treaty) might

99


provide this key element, greatly increasing the prospects not only for arbitration

in the event of a dispute but also for enforcement of the contract and the award of

damages. This would only apply if a stabilisation provision existed in the

petroleum contract in the first place.

• As the review of cases in Chapter 4 has shown, ICSID is becoming an important

forum for state-investor disputes in expropriation matters. While caution should

be exercised with respect to its jurisdictional requirements, it remains a highly

attractive form of dispute resolution and enforcement.

• Provision for damages in the event of unilateral action should be expressly

provided for in the petroleum contract. The obligation of the host government to

pay monetary compensation should be accompanied by detail on the kind of

monetary remedies that are appropriate: a stipulated quantum of money damages;

restitution, reimbursement and indemnification.

• The proper design of protections for the investor in the event of unilateral

alteration of the economic equilibrium should be seen as enhancing the investor’s

position in the first stage of discussions or negotiations with the host government.

It may persuade the host government to address the issue without any recourse to

arbitration.

• A full and comprehensive documentation of due diligence may appear to be

obvious to a prudent investor but at a later stage such documentation could prove

to be decisive in determining whether the investor has a case or not.

100


Select Bibliography

1. Laws & Contracts Cited in Text105

5.1 Country Legislation and Contracts

Azerbaijan: Agreement on the Joint Development and Production Sharing for the

Azeri and Chirug Fields and the Deep Water Portion of the Gurashli

Field in the Azerbaijan Sector of the Caspian Sea, 20 September 1994.

Bolivia: Model Production Sharing Contract, 1997.

Chile: Decree-Law 1089 of 1975.

Egypt: Concession Agreement of 2002 for Petroleum Exploration &

Exploitation between Egypt & The Egyptian General Petroleum

Corporation & Dover Investments Limited (East Wadi Araba Area

Gulf of Suez); source: Barrows Company Inc.

Ivory Coast: Petroleum Code 1996.

Kazakhstan: Production sharing agreement dated 8 April 1993 between the

Government of the Republic of Kazakhstan and the Oman Oil

Company Limited (Atyrau Exploration Area).

Contract for additional exploration for and production and production

sharing of crude hydrocarbons in the Chinarevskoye Oil and Gas-

Condensate Field in West Kazakhstan Oblast pursuant to licence series

MG no. 253D (Petroleum) between the Republic of Kazakhstan State

Committee for Investments (the Competent Body) and Production

sharing agreement between The Republic of Kazakhstan State 105 Unless otherwise indicated, the contracts refer to the author’s personal copies.

101


Committee for Investments (the Competent Body) and the Zhaikmunai

Limited Liability Partnership (the Contractor), Kazakhstan, 1997.

Kazakhstan Karachaganak Field PSA 1997 (author’s copy).

Mauritania: PSC of 1994.

Mozambique: Production Sharing Contract for the Sofala Field, 1998.

Model Contract for Oil and Gas (Decree 108 of 17 January 1997) and

Model Contract of 31 July 2001.

Nepal: Model Production Sharing Contract, 1994.

Qatar: Development & Production Sharing dated 23 December 2001 for

Dolphin Contract Location, North Field between Qatar & Offset

Investments Company Limited & TotalFinaElf E&P Dolphin.

Russia: PSA Law 1996 as amended

Tanzania: Texaco Production Sharing Agreement dated 7 May 1990 between the

Government of Tanzania, Tanzania Petroleum Development

Corporation and Texaco Exploration Tanzania Inc (Ruvuma Basin).

Production Sharing Contract of 1989 between

Total/Amoco/Marathon/Texaco and the Government of Kenya (Block

1).

Model Production Sharing Agreement between the Government,

TPDC and the Contractor, 1995.

Production Sharing Agreement between the Government of the United

Republic of Tanzania, the Tanzania Petroleum Development

Corporation and Pan African Energy Tanzania Ltd, relating to the

Songo Songo Gas Field, 2001.

Trinidad and Tobago: Model Production Sharing Contract 2000 (2nd version).

102


Tunisia: Model Production Sharing Contract, 1989.

5.2 International Instruments Energy Charter Secretariat: Model Inter-Governmental Agreement for a Cross-

Border Pipeline Project.

Energy Charter Secretariat: Model Host Government Agreement for a Cross-Border

Pipeline Project.

The Gambia-Netherlands BIT (2002).

West African Gas Pipeline Agreement: International Project Agreement, 22 May

2003 (author’s copy).

Treaty on the West African Gas Pipeline Project between the Republic of Benin, the

Republic of Ghana, the Federal Republic of Nigeria and the Republic of Togo

(author’s copy).

Convention on the Law of Treaties (Vienna), 23 May 1969), 8 ILM 679 (1969).

Host Government Agreement between and among the Government of the Azerbaijan

Republic and the State Oil Company of the Azerbaijan Republic, BP Exploration

(Caspian Sea) Ltd., Statoil BTC Caspian AS, Ramco Hazar Energy Limited, Turkiye

Petrolleri A.O., Unocal BTC Pipeline Ltd., Itochu Oil Exploration (Azerbaijan) Inc.,

Delta Hess (BTC) Limited, 17 October 2000.

Convention on Access to Information, Public Participation in Decision-Making and

Access to Justice in Environmental Matters, done at Aarhus, Denmark, on 25 June

1998, 38 ILM 517 (1999).

Convention on Environmental Impact Assessment in a Transboundary Context, done

at Espoo, Finland, on 25 February 1991, 30 ILM 802 (1991).

EC Environmental Impact Assessment Directive 85/337/EEC, as amended by

Directive 97/11/EC and Directive 2003/35/EC.

UN Convention on the Law of the Sea 1982, 21 ILM 1261 (1982).

Vienna Convention for the Protection of the Ozone Layer 1985, 26 ILM 1529 (1985).

Montreal Protocol on substances that delete the Ozone Layer 1987, 26 ILM 154

(1987).

103


Convention on the Control of Trans-Boundary Movements of Hazardous Wastes and

their Disposal (Basel Convention 1989), 28 ILM 657 (1989).

UN Framework Convention on Climate Change 1992, 31 ILM 849 (1992).

Convention on Biological Diversity 1992, 31 ILM 822 (1992).

UNFCC Kyoto Protocol 1997, 37 ILM 22 (1998).

ILO Convention 169.

The Rio Declaration on Environment and Development, U.N. Doc. A/CONF.151/5/Rev. 1(1992) 31 ILM 874.

The Stockholm Declaration on the Human Environment, 1972 Declaration of the UN

Conference on the Human Environment, UN Doc. A/CONF.48/14/Rev. 1(1972),

reprinted in 11 I.L.M. 1416 (1972).

2. Agreements Consulted in Research

Azerbaijan: Agreement on the Exploration, Development and Production Sharing for

the Karabakh prospective structure and area adjacent in the Azerbaijan sector of the

Caspian Sea among the state oil company of the Azerbaijan Republic and Lukoil,

Agip, Lukagip, NV, Pennzoil Caspian Development Corporation.

Bahrain: Chevron Offshore Exploration and Production Sharing Agreement with

Government of Bahrain, Feb. 1998, Barrows Supplement (Middle East), No. 152.

Bangladesh: Bangladesh model production sharing contract, 1997, CEPMLP

collection.

Brazil: Model ANP Concession Agreement for the Exploration, Development and

Production of Oil and Gas between National Petroleum Agency of Brazil and

Contractor, March 2001, Barrows Supplement (South America), No. 147.

Model Concession Agreement of 18 May 2000 for Exploration and Development of

Oil and Gas between National Petroleum Agency (ANP) and Concessionaire.

Model ANP Concession Agreement for the Exploration, Development and Production

of Oil and Gas between ANP and Contractor (March 2001).

104


Brunei: Joint Operating Agreement between Jasra Jackson Sendirian Berhad, Elf

Aquitaine Offshore Asia BV, and Pengiran Dato Paduka HJ Abdul Rahman Bin

Pengiran HJ Abdul Rahim dated 10 December 1986.

Model Petroleum Agreement of Brunei Darussalam, from 2000, Art 25.

Egypt: Concession Agreement of 2002 for Petroleum Exploration & Exploitation

between Egypt & the Egyptian General Petroleum Corporation & Dover Investments

Limited.

Ghana: Model Petroleum Agreement between the Government, Ghana National

Petroleum Corporation & Contractor, printed in Barrows Basic Oil Laws and

Concession Agreements, (Central and …Africa) Supplement no. 139.

Ghana Model Petroleum Contract, 2001, Barrows supplement (South and Central

Africa), No. 157.

Model Production Sharing Agreement of Ghana of 1995 between the Government,

the Ghana National Petroleum Corporation and Contractor, Barrows Basic Oil Laws

and Petroleum Contracts, Central and South Africa, Supplement No. 122.

India: Enron/Reliance Production Sharing dated 22 December 1994 between the

Government and ONGC, Reliance Industries Ltd & Enron Oil & Gas India Ltd (Tapti

Block).

ONGC/Shell PSC dated 15 May 1995 between the Government and ONGC & Shell

India Production Development BV (Rajasthan Block);

Model PSC for Offshore Areas (NEPL IV).

Indonesia: Production Sharing Contract dated 20 May 1991 between Perusahaan

Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) & Union Texas (KAI)

Limited, Unocal Kai Ltd and Total KAI (KAI Block).

OPIC/Treasure Bay 1995 Production Sharing Contract between Perusahaan

Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) and Overseas Petroleum

105


and Investment Corporation (OPIC) and Treasure Bay Enterprises Ltd (TBE)

(Peudada Block, Offshore Aceh).

Unocal 1997 Production Sharing Contract among Pertamina and PT Nusamba Kaltim

Pratama and Unocal Rapak Lts (Rapak Block).

Unocal Production Sharing Contract of 1998 between Pertamina, PT Nusama Energy

Pratama & Unocal Ganal Ltd (Ganal Block).

Production Sharing Contract dated 14 October 2003 between Badan Pelaksana

Kegiatan Usaha Minyak Dan Gas Bumi (BPMIGAS) & Provident Indonesia Energy

LLC (Tarakan Area).

Peru: Model License Contract of Peru, 2000 for exploration and Exploitation of

Hydrocarbon, Barrows supplement (South America), No. 148.

Model Petroleum Agreement of 2000, Barrows Supplement (Central America and

Caribbean States) No. 121.

Russian Federation: Agreement on the Development of the Piltun-Astokhskoe and

Lunskoe Oil and Gas Fields on the Basis of Production Sharing, June 1994.

Law No.97-16 of 7 August 1997 to approve the draft Convention of Establishment

concluded between the Republic of Cameroon and Cameroon Oil Transportation

Company (COTCO) and to authorize the Government to sign it, 1 October 1997.

Thailand: Petroleum Concession No 1/2522/16 dated 15 March 1979 between the

Ministry of Industry & Shell Exploration BV;

Petroleum Concession No 7/2539/54 awarded to Anschutz (Thailand) Company Ltd

on 15 November 1996;

Petroleum Concession No 7/2546/64 awarded to Nucoastal (Thailand) Ltd on 17 July

2003.

Venezuela: Operating Agreement of Venezuela, 29 July 1997 between Corpoven,

S.A. and Compania General De Combustibles S.A., and Carmanah Resources

(Venezuela) Ltd, Barrows supplement (South America) No. 144.

106


Venezuela Model Operating Services Agreement of 1993, Barrows supplement No.

117, (South America).

Operating Service Agreement between Corpoven SA and Lingoteras de Venezuela

CA, 1992.

Operating Agreement dated 29 July 1997 between Corpoven SA, Compania General

de Combustibles SA and Carmanah Resources (Venezuela) Ltd (Onado Area).

3. Enforcement

Saudi Arabia v Arabian American Oil Co (Aramco), 27 ILR 117 (1963);

Sapphire Petroleum Ltd v National Iranian Oil Co, 35 ILR 136 (1967)

Texaco Overseas Petroleum Co/California Asiatic Oil Co v Libyan Arab Republic, 17

ILM 1 (1977);

Revere Copper & Brass Inc. v Overseas Private Investment Corporation, 17 I.L.M. (1978) pp. 1321- 1342; Texas Overseas Petroleum Company and California Asiatic Oil Company v. Government of the Libyan Arab Republic, 17 ILM (1978), pp. 1-37; BP Exploration Co (Libya) v Libyan Arab Republic, 53 ILR 297 (1979);

Alcoa Minerals of Jamaica v Jamaica, YB Com Arb 206 (1979);

Libyan American Oil Co (LIAMCO) v Libyan Arab Republic, 20 ILM 1 (1981);

AGIP Co v Popular Republic of the Congo, 21 ILM 726 (1982)

Kuwait v American Indep Oil Co (Aminoil), 21 I.L.M 1051 (1982);

107


Starret Housing Corp. v. Islamic Republic of Iran, 4 Iran-US Claim Tribunal Report (1983-III), 12-182; Sedco, Inc. v. National Iranian Oil Co., Interlocutory Award 9 Iran-U.S. Cl. Trib. Rep. (1985) pp. 248-283;

Liberian E Timber Corp (LETCO) v Republic of Liberia, 26 ILM 647 (1987);

Amoco International Financial Corporation v. Islamic Republic of Iran, 15 Iran-U.S. Claim Tribunal Report (1987-III), pp. 189-309;

Mobil Oil vs. Iran, 16 Iran-U.S. Claims Tribunal Report (1987-III), pp. 3-75; Too v. Greater Modesto Insurance Associates, 23 Iran-U.S. Claim Tribunal Report (1989-III), pp. 378-397;

Phillips Petroleum Co Iran v Islamic Republic of Iran, 21 Iran-US Cl. Trib Rep 79

(1989);

Wintershall A.G., Et Al v. The Government of Qatar, 28 ILM 798 (1989);

Del Desarrollo de Santa Elena, S.A. V. Costa Rica, Final Award P 77 (ICSID Case No. ARB/96/1, Feb. 17, 2000), 15 ICSID Review-Foreign Investment Law Journal (2000), 169; Metalclad Corp. v. United Mexican States, Award (ICSID (Additional Facility) Case No. ARB (AF)/97/1, Aug. 30, 2000, 16 ICSID Rev.-FILJ (2001), 168; Pope & Talbot Inc. v Government of Canada, Interim Award of 26 June, 2000, 40

ILM 258 (2001);

Marvin Roy Feldman Karpa v United States of Mexico (2002), ICSID Case No

ARB(AF)/99/1, Award;

Occidental Exploration and Production Company v. The Republic of Ecuador, Final Award, LCIA Case No. UN3467 of 1 July, 2004, 43 ILM 1248 (2004) and The Republic of Ecuador v Occidental Exploration and Production Company, LCIA Case No. 04/656 (2 March, 2006); S.D. Myers, Inc. v. Government of Canada, Partial Award (Nov. 13, 2000), p. 282, 40 I.L.M. 1408;

108


Tecnicas Medioambientales Tecmed S.A. v. Mexico, Award of May, 2003, 43 ILM 133(2004); CME Czech Republic B.V. v Czech Republic (2003)(available at

www.investmentclaims.com);

MTD Equity Sdn. Bhd and MTD Chile S.A. v The Republic of Chile (2004), ICSID

Case No.ARB/01/7, Award of 25 May, 2004;

Waste Management Inc. v United States of Mexico (2004), ICSID Case No.

ARB(AF)/00/3, Award of 30 April, 2004;

CMS Gas Transmission Co. v Argentina (2005), ICSID Case No. ARB/01/8, Award f

12 May, 2005;

EnCana Corporation v Republic of Ecuador (2006), London Court of International

Arbitration, Award & Partial Dissenting Opinion (Horacio A Grigera Naon)

4. Internet Websites

www.hm-treasury.gov.uk

www.oilgas.kz www.encharter.org

www.caspiandevelopmentandexport.com

www.lcia-arbitration.com

www.iccwbo.org/court/english/awards/awards.asp

www.iaia.org

www.ifc.org/enviro/

www.oilandgas.org.uk

www.unep.org

www.worldbank.org/icsid/cases/awards.htm

109


www.investmentclaims.com

www.ogp.org.uk

www.cepmlp.org

5. Commentaries

5.1 Books and Monographs

Alfaruque, A, ‘Stability in Petroleum Contracts: Rhetoric and Reality’ (unpublished

PhD thesis, University of Dundee, 2005);

AIPN Host Government Agreement Handbook, vol 2 (forthcoming);

Brownlie, D, ‘Principles of Private International Law’.

Cameron, P, ‘Property Rights and Sovereign Rights: The Case of North Sea Oil’,

Academic Press, London, 1983.

Rubins, N and S Kinsella, ‘International Investment, Political Risk and Dispute

Resolution: A Practitioner’s Guide’, Oceana Publications, New York, 2005.

Smith, EE, Dzienkowski, JS, Anderson, OL, Conine, GB, Lowe, JS and BM Kramer,

International Petroleum Transactions’ (2nd ed)(2000).

Sornarajah, M, The International Law on Foreign Investment (2nd ed), Cambridge

University Press, Cambridge, 2004.

5.2 Reports

OECD, Directorate for Financial Enterprise Affairs, Working Papers on International

Investment No. 2004/3, ‘Fair and Equitable Treatment Standard in International

Investment Law’.

‘Indirect Expropriation’ and the ‘Right to Regulate’ in International

Investment Law, September 2004.

Roundtable on Corporate Responsibility: Encouraging the Positive

Contribution of Business to Environment through the OECD Guidelines for

Multinational Enterprises, June 2004.

110


OGP, “Principles for Impact Assessment: The Environmental and Social Dimension”

(Report No. 2.74/265).

“Decommissioning, Remediation, and Reclamation Guidelines for Onshore

Exploration and Production Sites (Report No. 2.70/242).

“Exploration and Production Waste Management Guidelines” (Report

No.2.58/196). “Oil Industry Operating Guideline for Tropical Rainforests”

(Report No. 2.49/170).

UNIDROIT Principles: Published by the International Institute for the Unification of

Private Law (UNIDROIT), 1994.

5.3 Chapters in Books

Alexander, FA, ‘The Three Pillars of Security of Investment Under PSCs and Other

Host Government Contracts, chapter 7 of Institute for Energy Law of the Center for

American and International Law’s Fifty-Fourth Annual Institute on Oil and Gas Law

(Publication 640, Release 54), Lexis Nexis Matthew Bender (2003);

Cameron, P (with E Correa), ‘Towards the Contractual Management of Public

Participation Issues: A Review of Corporate Initiatives’, in Human Rights in Natural

Resource Development, Oxford, 2002, 215-230;

Daintith, Terence C, ‘Contract Design and Practice in the Natural Resources Sector’,

in ‘The Complex Long-term Contract: Structures and International Arbitration’, (ed)

Fritz Nicklisch, Heidelberg, 1987, 151-169.

FA Mann, `State Contracts and State Responsibility’, in his `Studies in International

Law’ (1973), 302-26

5.4 Articles and Papers

Akpan, George Sampson, “Environmental and Human Rights Problems in Natural

Resources Development-Implications for Investment in Petroleum and Mineral

Resources Sectors”, CEPMLP Internet Journal, vol. 6-5a Article.

111


Amador, FV Garcia, “State Responsibility in Case of “Stabilisation” Clauses”, 2

Journal of Transnational Law and Policy, (1993), pp. 23-50.

Berger, Klaus Peter, “Renegotiation and Adaptation of International Investment

Contracts: The Role of Contract Drafters and Arbitrators”, 36 Vanderbilt Journal of

Transnational Law (2003), pp. 1347- 1380.

Bernardini, Piero, “The Renegotiation of the Investment Contract”, 13 ICSID

Review-Foreign Investment Law Journal, No. 2, 1998, p. 411-425.

Bishop, RD, ‘Survey of Published International Arbitration Awards Involving the

Petroleum Industry: the Development of a Lex Petrolea’, 2002 Rocky Mountain

Mineral Law Foundation International Energy and Minerals Arbitration Mineral Law

Series 2-25 (2002).

Bishop, RD, ‘International Arbitration of Petroleum Disputes: The Development of a

Lex Petrolea’ (author’s copy).

Bishop, RD, “The Duty to Negotiate In Good Faith and the Enforceability Of Short-

Term Natural Gas Clauses in Production Sharing Agreements”, CEPMLP Internet

Journal, vol. 2, article 1, www.cepmlp.org., p.2,

Bouchez, Leo J., “The Prospects for International Arbitration: Disputes Between

States and Private Enterprises”, 8 Journal of International Arbitration, (1991), pp. 81-

115.

Bowett, DW, “State Contracts with Aliens: Contemporary Developments on

Compensation for Termination or Breach”, 59 British Yearbook of International Law

(1988), pp. 49-74.

Roland Brown, `Contract Stability in International Petroleum Operations’, The CTC

Reporter, No. 29 (spring 1990), 56-60.

- “The Relationship between the State and the Multinational Corporations in the

Exploitation of Resources”, 33 International and Comparative Law Quarterly, (1984),

pp. 218-229.

Chatterjee, SK, “The Stabilisation Clause Myth in Investment Agreements”, 5 Journal

of International Arbitration, (1988), pp. 97-111.

Chiati, A. Z. El, “Protection of Investment in the Context of Petroleum Agreement”,

Hague Recueil Des Cours, 1987(IV), pp. 19-169.

112


Coaele, Margarita T.B., “Stabilisation Clauses in International Petroleum

Transactions”, 30 Denver Journal of International Law and Policy, (2002), pp. 217-

237.

Comeaux, Paul E., and Kinsella, N. Stephan, “Reducing Political Risk in Developing

Countries: Bilateral Investment Treaties, Stabilisation Clauses and MIGA & OPIC

Investment Insurance”, 15 New York Law School Journal of International &

Comparative Law, (1994), pp. 1- 48.

Declercq, P.J.M., “Modern Analysis of the Legal Effect of Force Majeure Clauses in

Situations of Commercial Impracticability”, 15 Journal of Law and Commerce,

(1995), pp. 213-255.

Delaume, Georges R., “Excuse for Non-Performance and Force Majeure in Economic

Development Agreements”, 10 Columbia Journal of Transnational Law, (1971), pp.

242-266.

- “The Proper Law of State Contracts Revisited”, 12 ICSID Review-FILJ, (1997), pp.

1-28.

Dolzer, Rudolf, “Indirect Expropriations: New Developments?” 11 New York

University Environmental Law Journal, (2002), pp. 64-93.

El-Kosheri, Ahmed S. and Riad, Tarek F., “The Law Governing a New Generation of

Petroleum Agreements: Changes in the Arbitration Process”, 1 ICSID Rev.-F.I.L.J.,

(1986), pp. 257-287.

El-Kosheri, Ahmed S., “The Particularity of the Conflict Avoidance Methods

Pertaining to Petroleum Agreements”, 11 ICSID Review -Foreign Investment Law

Journal (1996), pp. 272-285.

Faber, Mike & Brown. Roland, “Changing the Rules of the Game: Political Risk,

Instability and Fair play In Mineral Concession Contracts”, 2 Third World Quarterly,

(1980), p. 100-119.

Fabricant, Robert, “Production Sharing Contracts in the Indonesian Petroleum

Industry”, 16 Harvard International Law Journal, 1975, pp. 303-351.

Flores, Michelle, “A Practical Approach to Allocating Environmental Liability and

Stabilising Foreign Investment in the Energy Sectors of Developing Countries”, 12

Colorado Journal of International Environmental Law and Policy, (2001), pp. 141-

163.

113


Forsyth, SG and V Boiteau: ‘Chad-Cameroon Development and Pipeline Project

Legal Issues, in International Energy Law and Taxation Review (2004), 112-123.

Fortier, L Yves and Stephen L Drymer, ‘Indirect Expropriation in the Law of

International Investment: I Know it When I See It’, 19 ICSID Review – Foreign

Investment Law Journal (2004) 293.

Gotanda, John Y., “Renegotiation and Adaptation Clauses in Investment Contracts,

Revisited”, Vanderbilt Journal of Transnational Law, (2003), pp. 1461-1473.

Greenwood, C.J., “State Contracts in International Law-The Libyan Oil Arbitration”,

53 Brit.Y.B. INT’L (1982), pp. 27-81.

Hansen, Timothy B., “The Legal Effect of Given Stabilisation Clauses in Economic

Development Agreements”, 28 Virginia Journal of Int’l L. (1987-88), pp. 1015-1041.

Higgins, Rosalyn, “The Taking of Property by the State: Recent Developments in

International Law”, Hague Recueil Des Cours, (1982-III), pp. 263-391.

Jennings, Robert, “State Contracts in International Law”, 37 B.Y.I.L. (1961) pp. 156-

182.

Johnston, D, ‘Contract Terms Worldwide: A Case for New Frameworks’ (available at

www.danieljohnston.com).

Kolo, ABBA, “Managing Political Risks in Transnational Investment Contracts”,

CEPMLP internet Journal, www.cepmlp.org, vol. 1, article 4.

Lowe, Vaughan, “Regulation Or Expropriation?” 55 Current Legal Problems, (2002),

pp. 447- 466.

Maniruzzaman, A.F. M., “State Contracts with Aliens: The Question of Unilateral

Change by the State in Contemporary International Law”, J. of International

Arbitration, 1992.

- “International Development Law as Applicable Law to Economic Development

Agreements: A Prognostic View”, 20 Wisconsin International Law Journal, (2001),

pp. 1-56.

- International Arbitrator and Mandatory Public Law Rules in the Context of State

Contracts: An Overview, 7 Journal of International Arbitration (1990), p. 53-64.

Mann, F.A., “British Investment Treaties for the Promotion and Protection of

Investments”, 52 British Year Book of International Law, (1981), pp. 241-254.

114


- “State Contracts and State Responsibility”, 54 Am. J. Int’l L.(1960), pp. 572-591.

Bertrand Montembault, `The Stabilisation of State Contracts using the Example of

Petroleum Contracts: A return to the Gods of Olympia?’ in RDAI/IBLJ, No. 6, 2003,

593-643.

Oil and Gas Producers Group, `Key Questions in Managing Social Issues in Oil and

Gas Projects’, available on OGP website.

Pring, George (Rock), Otto, James, and Naito, Koh, “Trends in International

Environmental Law Affecting Mineral Industry”, (Part 1), 17 Journal of Energy and

Natural Resources, (1999) pp.39-55.

Rowat, Malcom D., “Multilateral Approaches to Improving the Investment Climate of

Developing Countries: The Cases of ICSID and MIGA”, 33 Harvard International

Law Journal (1992), pp. 103-144.

Salacuse, Jeswald W., “Renegotiating International Business Transactions: The

Continuing Struggle of Life Against Form”, 35 International Lawyer, (2001),

pp.1507-1541.

Shyngyssov, A, ‘Tax Stability and Assurances for Petroleum Operations’, in Oil &

Gas of Kazakhstan (2004), 60-67.

Smith, David N., and Wells, Louis T., “Conflict Avoidance in Concession

Agreements”, 17 Harvard International Law Journal, (1976), pp. 51-70.

Stevens, P, ‘Oil Markets’, 21 Oxford Review of Economic Policy, 19-42.

Tason, Fernando R., “State Contracts and Oil Expropriations: The Aminoil–Kuwait

Arbitration”, 24 Virginia Journal of International Law, (1984), pp. 323-358.

Terki, Nour Eddine, “The Freezing of Law Applicable to Long-Term International

Contracts, Journal of International Banking Law”, 1991, pp. 43-47.

Thomas, William L., “Equator-Risk and Sustainability”, Project Finance

International, Yearbook, 2004, pp.10-16.

Tschanz, “The Contributions of the Aminoil Award to the Law of State Contracts”, 18

Int’l Law, (1984), pp.245-281.

Vagts, Detlev F., “Foreign Investment Risk Reconsidered: The View from the 1980s”,

2 ICSID Rev.-FILJ, (1987), pp. 1-18.

115


Verhoosel, Gaetan, “Foreign Direct Investment and Legal Constraints on Domestic

Environmental Policies: Striking a “Reasonable” Balance between Stability and

Change”, 29 Law and Policy in International Business (1998), pp. 451-479.

Waelde, Thomas and Kolo, Abba, “Environmental Regulation: Investment Protection

and ‘Regulatory Taking’ in International Law”, 50 International and Comparative

Law Quarterly, (2001), pp. 811-848.

Waelde, Thomas W., and Ndi, George, “Stabilising International Investment

Commitments: International Law Versus Contract Interpretation”, 31 Texas

International Law Journal, 1996, pp. 215-267.

Waelde, Thomas and Kolo, Abba, “Renegotiation and Contract Adaptation in the

International Investment Projects: Applicable Legal Principles and Industry

Practices”, 1 Journal of World Investment (2000), pp. 5-58.

Wagner, J. Martin, “International Investment, Expropriation and Environmental

Protection”, 29 Golden Gate University Law Rev. (1999), pp. 465-538.

Wawryk, Alexandra S., “Adoption of International Environmental Standards by

Transnational Oil Companies: Reducing the Impact of Oil Operations in Emerging

Economies”, in: Journal of Energy & Natural Resources law Vol.20 No.4 (2002), pp.

402-434.

Worika, Ibiba Lucky, Environmental Taxation of Mining and Petroleum Investment,

10 OGLTR, (1997). pp. 367-374.

Zorn, Stephen A., “Unilateral Action by Oil-Producing Countries: Possible

Contractual Remedies of Foreign Petroleum Companies”, 9 Fordham International

Law Journal, (1985-86), pp. 63-96.

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Documents

Stabilisation in Investment Contracts and Changes of Rules ...€¦ · stabilisation but with respect to the second, ... stability in these particular kinds of long term investment